Waiting for Wage Growth

WASHINGTON, DC—The Labor Department's May unemployment report was greeted with much relief on Friday. Long story short: there were some 280,000 jobs created last month -- the largest increase in half a year -- and the unemployment rate climbed to 5.5% from 5.4%, indicating that more people began looking for employment.

So that is that, until next month's figures, of course. But economic growth, or in this case, job growth, is only one component of a larger overarching story -- namely, the timing of the Federal Reserve Bank's decision to raise benchmark interest rates. And here, May's employment report, offers an interesting clue.

First, though, an explanation: While the Central Bank's ultimate decision-making on this issue is somewhat opaque, wage growth or lack thereof is clearly major indicator it is watching, along with the general unemployment rate. A sudden jump in hourly wages could suggest that inflation may be heating up -- hence the need to pull the trigger.

On Friday, the Labor Department reported that average hourly earnings for all employees on private nonfarm payrolls rose by 8 cents to $24.96.

Over the year, the Labor Department said, average hourly earnings have risen by 2.3%.

To put those figures in context consider these month over month and year over year movements in wage growth:

The month before last, in April of 2015, average hourly earnings for all employees on private nonfarm payrolls rose by 3 cents.

In March 2015, it was by 7 cents.

Year over year, payrolls rose by 5 cents in May 2014.

In April 2014 average hourly earnings were unchanged at $24.31.

And in March 2014, average hourly earnings for all employees on private nonfarm payrolls edged down by 1 cent to $24.30, following a 9-cent increase in February. At that point, the Labor Department said average hourly earnings had risen by 49 centers or 2.1% over the year.

There are various interpretations of this data. One very valid school of thought is that wage growth has been modest -- and indeed there is plenty of evidence to show that middle class incomes have been stagnating for years, exacerbating the already-stark income inequality divide in this country.

For the commercial real estate industry, though, a deeper dive into these numbers is worthwhile.

First of all, while private-sector wages are up 2.3% year-over-year, they are one percentage point higher for professional and business services -- i.e. office-occupying workers, JLL Research Director Scott Homa tells GlobeSt.com. Also, job creation when measured against population growth also suggests a more robust job market, he continues.

"The economy is creating jobs faster than population growth in even slow-growth major metro areas. Inevitably, this should lead to a difficult situation for employers, in which they won't be able to attract and retain the talent they need without increasing compensation, particularly in the highly skilled industries that comprise the majority of the office market."

In short, wages, especially for professional jobs, are poised to increased even faster. Or as Homa puts it: "The May employment report indicates that a looming talent shortage is on the horizon."

All of this is just one piece for the Fed to consider, of course. Shortly before the Labor Department released its figures, the International Monetary Fund urged the Fed to hold off on raising rates until at least 2016. It was a surprising signal to send.

The IMF came to this conclusion following its annual review of the state of the US economy, in which it cut growth estimates for 2016 from 3.1% to 2.5%. If Fed policy makers were to raise interest rates now and then backtrack it would lose a lot of creditability, it said.

More to the point, "raising rates too soon could trigger a greater-than-expected tightening of financial conditions or a bout of financial instability, causing the economy to stall," it said in its statement.

How much of a consideration this will have for the Fed -- especially its more economic hawkish members -- is unknown and basically out of the industry's hands anyway.

Perhaps the CRE community would be better off concentrating on what we do know about the economy from this latest release.

Wage growth is happening and is poised to grow even more, especially among office-using occupations. That suggests demand for such workers will also increase.

Consumers also appear to have recovered from their blahs earlier in the year. "A strong uptick in employment related to discretionary spending, such as in retail trade and leisure and hospitality, combined with a surge in May auto sales to a near-decade high reported earlier this week, suggest that consumers are poised to bounce back after a breather early this year," said Doug Duncan, Chief Economist of Fannie Mae, in a prepared statement.

"The consumer response to healthy job growth and lower energy costs that was expected to start the year appears to finally be underway. Consumer spending growth is likely to tick up from its lackluster growth in the prior quarter, but isn't expected to be as robust as the fourth quarter of 2014."

Oh and those wage increases? They are also bumping up construction workers' pay, which will surely pop up in development costs.

The average hourly earnings of all employees in construction rose to $27.34, a gain of 2.7% over the past year, up from 2.3% in the previous 12 months and 1.3% from May 2012 to May 2013, according to the Associated General Contractors of America. The steepest wage increases among construction segments, which are reported with a one-month lag, occurred in residential building (4.8% from April 2014 to April 2015) and heavy and civil engineering construction (5.1%), while hourly earnings rose 3.3% in nonresidential building and 1.6% in specialty trades (residential and nonresidential combined).