The October Jobs Report

Last Friday’s employment report offered little evidence that firms are poised to accelerate the pace of hiring. On the contrary, growth in total employment fell to its weakest pace in four months. Particularly in sectors related to demand for office space, October’s payroll gains remain frustratingly slow, once again qualifying the near-term outlook for net absorption and property fundamentals.

Employers added 80,000 net new jobs in October, falling short of consensus projections ahead of the report’s release. Offsetting that result, August and September’s results were revised up sharply, adding a net of 102,000 jobs to the previous tally. That positive news complements this month’s relatively stronger private sector trends. October’s headline result reflects an increase of 104,000 private sector jobs. In line with expectations, the ongoing contraction of government payrolls siphoned 24,000 jobs. This pattern is expected to persist for some time, though it has yet to show its full force at the federal level.

The imbalance in the jobs recovery extends beyond the private-public divide. As shown in the above chart, contraction in government payrolls has been the most observable drag on the labor market. Cuts have been concentrated in state and local government, in areas outside of education. The magnitude of the cutbacks in government jobs could increase and become more geographically concentrated as federal spending adjustments come into effect.

However modest, increases in employment over the last year have included gains across a wider range of sectors. Health services have been a mainstay of the recovery, driven by demographics and entitlement spending that has been largely immune to spending controls. Professional and business services have been the only area to outpace healthcare. But office investors should take note that almost half of these jobs have been in administrative and temporary employment, consistent with firms’ current hesitation in growing permanent employment. These jobs are weakly correlated with demand for core office space. In financial services, on the other hand, there are slightly fewer jobs today than a year ago.

Why are businesses holding back? Complementary data and survey sources indicate that a weak demand outlook and policy uncertainty remain the dominant headwinds to investment in hiring and capital. In the National Federation of Independent Business’ small business survey for October, only a small minority of businesses cites credit availability as a constraint.  A net negative 10 percent report weaker sales.

The NFIB takes a guarded view of the proposed American Jobs Act, stating that, “… the President’s jobs program will be very ineffective if enacted. Promising temporary tax cuts financed by permanent income tax increases will not play well, especially for small business owners who pay taxes based on personal, not corporate tax rates.” That assessment concurs with our own analysis, articulated in September, that the Jobs Act will fail to improve labor market outcomes materially.