August 3, 2018

  • Headline: July’s jobs report, while below consensus expectations, signals that the U.S. economy remains on solid footing. U.S. employment rose by 157,000 jobs in July, below consensus expectations of approximately 190,000 and below average monthly gains of 203,000 over the past year. If losses from the Toys R Us bankruptcy are excluded, the jobs gain would be very close to target. The unemployment rate fell slightly to 3.9%, while the labor force participation rate remained unchanged at 62.9%. Average hourly earnings rose by 7 cents month-over-month, and wages were up 2.7% year-over-year in July. Substantial revisions to May and June jobs numbers resulted in a net gain of 59,000 jobs, demonstrating the health of the U.S. labor market. Employment has grown by nearly 2.4 million over the past 12 months.
  • Executive Summary: Other recent signs of strength include robust economic growth in Q2. Jobs gains in professional & business services, in manufacturing and in health care & social assistance indicate that the economy continues to expand, showing late-cycle strength. While wage growth of 2.7% year-over-year met consensus expectations, it remains well below its historic trend. Average hourly earnings were growing roughly 4% year-over-year in 2000, when unemployment was as low as it is today. Productivity growth also remains low by historical standards. The 10-year U.S. Treasury yield has been largely unchanged since February, hovering around 3%. The 10-year break-even inflation rate—a measure of markets’ expectations of inflation 10 years from now—stands at about 2.1%. 
  • Wage Inflation: July’s wage growth of 2.7% year-over-year, while stronger than earlier in the expansion, is not historically commensurate with the current level of unemployment. The popular economic consensus remains that with labor markets continuing to tighten, wage growth should accelerate. For example, the Federal Reserve Bank of Atlanta recently reported that workers who switched jobs received annual pay increases averaging 4%, compared with average gains of 2.9% for those who did not change jobs. Given this report, the Fed remains on track to steadily raise short-term interest rates and reduce its balance sheet, which currently stands at nearly $4.5 trillion. The growing U.S. budget deficit has increased the federal government’s borrowing needs, placing upward pressure on long-term interest rates.
  • Job Growth Outlook: U.S. jobs growth—the longest streak of monthly gains on record—may get added momentum from recent tax reform, potentially extending the current cycle. However, additional jobs gains likely will be modest, given that the economy is operating at near-full capacity, an aging population is shrinking the available labor pool and productivity growth is low by historical standards. Recent financial market volatility has ebbed, as rhetoric around U.S. trade policy has largely been discounted.     
  • CRE Sector Employment:
    • Construction: The construction sector added 19,000 jobs in July and is up by 203,000 jobs year-over-year.
    • Industrial: Manufacturing continued to expand, adding 37,000 jobs in July—5,000 more than were added in June. The sector has added 327,000 jobs over the past year.
    • Retail: The retail sector added 7,100 jobs in July, despite the loss of 32,000 jobs in the goods, hobby, book & music stores sector, largely due to the Toys R Us bankruptcy. Employment in food services & drinking places increased by 26,000. The retail sector has added 203,000 jobs over the past year.  
    • Office: Professional & business services continued trending up in July, adding 51,000 jobs. The sector has added 518,000 jobs over the past year. In July, employment increased in temporary help services by 28,000 and in computer systems design & related services by 8,300. Employment in health care & social assistance rose by 33,500. Health care employment increased by 16,700 and is up by 286,000 over the year.