INSIGHTS ON DATA POINTS AND ECONOMIC POLICY
Jan 13, 2020
"We need to be humble in the precision of our understanding of full employment…the economy can operate with lower unemployment than we might have thought several years ago." — Richard Clarida, vice chair of the Federal Reserve board, speaking at the Council on Foreign Relations last week
The ability and willingness to change your mind, and your strategy, in the face of new evidence might be one of the most important skills anyone can possess. Clarida’s statement above reminds us of the quote from either John Maynard Keynes or Paul Samuelson, depending on who you ask: “When events change, I change my mind. What do you do?”
Our basic thesis for 2020 is for continued modest economic growth driven by continued modest job and wage growth, but we are keeping a close eye for evidence of a shift. And we got a lot of new evidence to look at last week, namely the December jobs report.
The headline numbers were mixed but generally just fine: 145,000 jobs added, and the unemployment rate held at a very low 3.5%, but wage growth slowed to 2.9% from 3.1% in the previous month. Much less of a blockbuster report than the surprisingly good November release, but not bad at all for the 111th straight month of job growth.
To determine if this report offers any signs of a shift, it helps to put the latest numbers in context. We like to look at longer-term trends in labor market data, which help smooth out the wrinkles of revisions and adjustments.
The chart below looks at the growth in aggregate payroll dollars, basically how much money is being earned in total in the US economy. It then segments the reason for changes in this figure: if more people are hired, or more hours are worked, or wages per hour go up, then so do aggregate payrolls. Note this graph is only for production and non-supervisory workers, favored by your authors as more indicative of labor tightness, stripping out things like executive pay, and also with more historical data available.
We see here why the labor market continues to humble policy makers. Despite a truly generational low in the unemployment rate, one not seen since the 1960s, the reasonable analyst cannot call this labor market “tight." Can a labor market be tight while hours are consistently falling, and wage growth is slowing? Even more confusing, an argument could be made (and we are currently making it) that the labor market was tighter in mid-2018 when the unemployment rate was higher. It makes sense, and likely due to greater participation today than a year ago as well as more headwinds on the horizon. That’s why the Federal Reserve was raising rates in 2018, and has been cutting them recently despite a still falling unemployment rate.
Quite a paradox. This is the Schrödinger's cat of labor markets. It is theoretically tight and not tight at the same time.
While this is interesting, commercial real estate depends more on buildings being filled than the above indicator that includes hours worked and wage growth. Looking at commercial real estate-relevant hiring sectors, 2019 was a year of slowing across the board.
Retail hiring actually slowed the least out of these select sectors, finishing barely positive, much like 2018. Perhaps that’s just due to the already low level of hiring throughout this cycle.
Much more dramatic slowing came in construction employment, manufacturing/warehousing (i.e. industrial space-using) and office-using employment. Should this slowdown continue, we’ll be on the lookout for slowing absorption across all property types in 2020.
Construction employment should likely turn around with the rapid pace of housing starts that we have seen recently. But how much of that will be offset by slowing commercial real estate construction?
It is starting to feel like we should be worried about a softer-than-expected labor market in 2020. Let’s look for more evidence.
The past two weeks have also seen the release of surveys of business confidence by the Institute for Supply Management, in which sentiment remains subpar.
Manufacturing sector expectations, in particular, came in at a new post-crisis low, contracting for the fifth month in a row. The sentiment among non-manufacturers is better, something we discussed two weeks ago, but remains sharply down from 2017-18. The surveys also reported mixed expectations for hiring, with manufacturing continuing to fall while service sector employment is holding at a healthy level, but down from a year ago.
Next week’s release of small business sentiment by the National Federation of Independent Businesses will give us another glimpse into the labor market, and more evidence to weigh.
It is too early to say what all this means for the rest of 2020. In the words of Clarida: stay humble!
The Week Ahead…
The coming week will test the ideas we laid out above. Retail sales data for December is released on Thursday. If the jobs report is any indication, consumers packed all their activity into the first couple weeks of December after a late Thanksgiving, suggesting a good number.
The NFIB survey for December is released on Tuesday, giving us another read on business sector confidence and the labor market. Let’s see how it follows up on mediocre ISM prints from the last few weeks. The NFIB released some early details with the jobs report, and they disappointed. Most notably, the number of jobs open has seriously rolled over, with only a third of firms having openings. This compares to 38% in November, and is the lowest mark since May 2018. Again, more on that next week.
Finally, the Consumer Price Index estimate for December is released on Tuesday, giving us a look at inflation. With the Fed taking such a dovish turn recently, there appears to be a lot of wiggle room for inflation to increase before any consideration of raising interest rates. This latest update is unlikely to change that without a serious jump, which is not expected.
A plethora of regional Fed presidents offer their update on the economy and policy following the jobs report. With little change in outlook since their last meeting, these are likely to be uneventful. Perhaps of most interest to markets, China may finally to sign the "Phase One" trade deal with the United States. President Trump told the press he expects a sign off on Jan. 15 or shortly thereafter, but we will believe it only when the ink dries.