For CRE Investors, Another Disappointing Employment Report

Employers added just 36,000 jobs in January, a fraction of the roughly 150,000 jobs anticipated in the consensus forecast. Many economists have blamed the weather for the weak result. But the current report is consistent with data from the second half of 2010 that shows firms remain resistant to hiring, even as corporate profits climb and consumer spending picks up. Conditions are ripe for employment growth, excepting lagging improvements in business confidence and a lack of visibility into future policy and regulatory change. And so the newest data offer a cautionary note for commercial real estate investors and lenders: the national labor market is still falling to keep pace with investment trends.

A Historically Anemic Jobs Recovery

By historic standards, the current labor market recovery is exceptionally anemic. Of the 8.8 million jobs lost during the downturn, only 1.0 million have been recovered. A majority of that improvement occurred in the first half of 2010. Since June of last year, employers have added just 284,000 jobs. And so, 36 months after the peak in employment, the labor market remains 5.6 percent below that most recent high. In all but one of the post-World War II recessions, employment had recovered in full within 32 months of its initial inflexion. As the chart below shows, even in the case of the 2001 recession, the labor market recovered substantially faster than the current trend.

Unemployment Rate Down

While employment gains were lackluster, the national unemployment rate improved in the most recent report. The unemployment rate fell sharply in January, from 9.4 in December to 9.0 percent. For commercial real estate investors, that decline must be taken in context. It resulted primarily from a drop in the size of the labor force and a commensurate decline in the labor participation rate, rather than the measured increase in actual employment. In thinking about space demand, it is the latter measure of job creation that is relevant for absorption.

As of January, there are 85.5 million Americans outside of the labor force, two million more than a year earlier. For the 13.9 million Americans who factor into the official count of unemployment, the mean duration of unemployment has increased over this period, from 30.5 weeks in January 2010 to 36.9 weeks in the newest tally.

Where the Jobs Are

The headline measures necessarily mask variations across several dimensions that are important for commercial real estate, including differences across age groups, geography, and professions. While metro statistics for January will not be available for several weeks, the current report does offer details of employment trends across sectors. Key observations follow:

The private sector continues to outpace public payrolls. The net increase of 36,000 jobs for January reflects a private sector increase of 50,000 jobs and a decline in public payrolls of 14,000. Most of the public decline is in local government offices. Significant private sector gains were reported in auto manufacturing, clothing stores, administrative and waste services, and health care.

Construction employment fell sharply, by 32,000 jobs. The decline may have been exaggerated by weather conditions. With that in mind, the drop in construction employment was also weighted towards non-residential construction. Non-residential construction accounted for just over 28,000 lost jobs.

In areas related to office-using employment, trends remain mixed. Administrative services have been a growth area. But at the high-end, employment gains in areas such as financial services are still weak. Financial activities employment fell by 10,000 jobs in January, bringing net losses to 60,000 jobs over the last year.