Employment Trends Portend a Mixed Outlook for Fundamentals
Sam Chandan PhD FRICS Real Capital Analytics and the Wharton School Patrick Therriault Real Capital Analytics In its monthly update of apartment sector trends, Axiometrics reported that effective rents increased for the second consecutive month in February. Axiometrics President Ron Johnsey points out that "January's increase of 0.18 percent was the first positive monthly effective rent gain since July 2008. February's increase was even stronger at 0.62 percent." In parallel with higher rents, occupancy increased to 91.97 percent in February, up from a cyclical low of 91.45 percent in early 2009. The recent spate of news regarding first quarter fundamentals - in the apartment and office sectors, in particular - offers some evidence that property fundamentals are stabilizing. But further near-term improvements in fundamentals are not assured. In spite of relatively stable national supply, whether even middling rent and occupancy gains are sustainable will depend on a material uptick in demand for space. This demand might follow from prospective tenants' anticipatory leasing. Better yet, it will follow from enduring - but hitherto elusive - improvements in the labour market. For many investors, the labour market outlook improved following news of March's net gain in non-farm payrolls. However modest, the uptick in employment is in stark contrast with the staggering job losses of late 2008 and early 2009. Unfortunately, a closer examination of the current payroll report reveals persistent weakness in key drivers of demand for high quality office and apartment space. A granular analysis reveals underlying trends that ultimately must temper our assessment of March's headline gains and their implications for multifamily and commercial real estate space markets. For example:
- At 15.8 percent, the unemployment rate for heads of household in their early 20s remains significantly higher than the national average. For heads of households between 25 and 34 - a group that accounts for a larger share of premium rental demand - the unemployment rate increased, from 9.8 percent to 10.0 percent.
- In key office-using occupations, employment declined in March. In information services, employment fell by 12,000 workers. In financial activities, employment fell by 21,000 workers. In professional and technical services, employment fell by 12,500 workers.
- Hourly-equivalent salaries and wages across information, financial, and professional services were generally flat over the month. Controlling for inflation, real wages in these sectors declined.
The March Employment Report in Detail The Bureau of Labor Statistics (BLS) released the March employment situation report on Friday, April 2. According to the establishment data (data based on industry survey responses), total non-farm seasonally adjusted employment increased by 162,000 jobs in March. However, the household data paints a less optimistic picture.
- Despite the increase in establishment employment, the national unemployment rate remained at 9.7 percent for the third consecutive month.
- An alternative measure of unemployment (including all persons unemployed and marginally attached to the labour force, plus total unemployed part-time for economic reasons) increased by 10 basis points in March, from 16.8 percent to 16.9 percent.
- The household data also registered 134,000 persons who became unemployed in March. The total number of unemployed persons in March was 15 million.
- The employment participation rate (a measure of those employed divided by the total civilian adult population) was 64.9 percent in March. This was up slightly from 64.8 percent in February, but down from 65.6 percent one year ago.
Unemployment Duration Edges Up With each passing month, the duration of unemployment increases. March's data show that the number of people out of work are increasing and that they are out of work for longer than ever previously recorded:
- The average duration of unemployment increased from 29.7 weeks in February to 31.2 weeks in March. The median duration rose from 19.4 weeks to 20.0 weeks.
- The number of long-term unemployed persons, or those unemployed for 27 weeks or more, increased by 414,000 in March. The total number of long-term unemployed persons reached 6.5 million, while growing as a share of all unemployed persons, from 40.9 percent in February to 44.1 percent in March.
- Persons working part-time for economic reasons (due to an inability to find full-time work) rose for the second consecutive month in March, to reach 9.0 million.
- The unemployment rate for those with less than a high school diploma decreased by 110 basis points, to 14.5 percent. For those with a bachelor's degree or higher, the unemployment rate decreased by 10 basis points, to 4.9 percent.
- For persons aged 20 to 24, a key renter demographic, the unemployment rate fell by 20 basis points, to 15.8 percent. However, for persons aged 25 to 34, the unemployment rate rose by 20 basis points, to 10.0 percent.
- For Black persons, the unemployment rate rose by 70 basis points, to 16.5 percent. For Hispanic or Latino persons, the unemployment rate increased by 20 basis points, to 12.6 percent.
- Unemployment rates are up year-over-year for all race, age group, and education deconstructions, but by no means have the increases been experienced evenly.
Goods-Producing Payrolls Of the net 162,000 jobs created in March, 123,000 jobs were in the private sector, including 41,000 jobs in goods-producing positions. Goods-producing industries have been a net source of job creation over the past two quarters:
- Manufacturing added a net of 17,000 jobs in March. This included 21,000 jobs created in durable manufacturing, slightly offset by 4,000 jobs lost in nondurable manufacturing.
- Over the past twelve months the construction industry has shed 700,000 jobs. In March, however, 15,000 jobs were created, including 9,400 in non-residential construction. In contrast, residential construction lost 800 jobs over March and has fared worse than its non-residential counterpart over the past two years. Along those lines, while residential specialty contracting lost 9,300 jobs in March, non-residential specialty contracting added 9,400.
- The retail trade industry added 14,900 jobs in March. Building material and garden supply stores surprised, adding 11,500 jobs. Clothing stores added 5,300 jobs in March, but remain 1,300 jobs lighter than one year ago. Most other sections of retail trade remained flat or declined slightly.
- 45,000 jobs were added in the education and health service industries in March, while 22,000 jobs were added in the leisure and hospitality industries.
- The information industry shed 12,000 jobs in March, continuing monthly losses from February and January. Over the past year, information has lost 135,000 jobs.
- The financial activities industry, which is a significant player in office-leasing activity, lost 21,000 jobs in March. Year-over-year, financial activities has contracted by 253,000 jobs.
- The professional services industry added a net of 11,000 jobs in March, although the 24,300 jobs created in administration and waste services and the 40,200 temporary help service jobs were heavily offset by losses in other areas.
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Dr. Sam Chandan
An irreverent take on the macroeconomic environment. Dr Sam Chandan is President and Chief Economist of Chandan Economics and an adjunct professor in real estate and public policy at the Wharton School of the University of Pennsylvania.
