According to the Bureau of Labor Statistics, the national unemployment rate has fallen to 4.3% as of May 2017. Most economists would describe this state of unemployment as near “full employment” as historical data analyses show that the country rarely dips below 4% and never for that long. Yet, this near historically low unemployment has occurred less from overly robust hiring, but instead from a lack of qualified workers able to fill open positions. In fact, the BLS reported in May a modest +138,000 jobs added to the economy, a good but not great number. Perhaps more importantly, the jobs report showed no single sector reporting significant losses, which indicates that all are hiring or holding steady. In addition, the only sector to have shown persistent losses over the last year, Mining (which includes energy production and exploration), has even reversed itself and is posting significant gains over the last few months. Therefore, the jobs report truly only supports the conclusion of an ever growing, albeit slowly, economy.
ECONOMIC GROWTH HELD BACK BY LOW LABOR FORCE PARTICIPATION RATE
The challenge lies in the measured economic growth rate which was reported as 1.2% first quarter revised annualized GDP growth by the BEA. Normally, such low unemployment would be accompanied by much higher GDP growth, as in the +3% range, but the U.S. economy has struggled to get above 2% over the past several years. The answer to this problem may be that the low unemployment rate is a result of a low supply of qualified workers and not an excessive amount of job creation. The labor force participation rate, which is the percentage of those theoretically able to work and/or desiring to work, remains low at 62.7%. This measure peaked above 67% in the early 2000’s, and has fallen in-part due to the retiring baby boomers. But following the Great Recession it fell rapidly down, approximately 66%, to this 62-63% range where it still hovers today. Why people are not desiring to or actually working as they did ten years ago is the subject of study and speculation beyond today’s scope. What is becoming clearer with each monthly jobs report, is that it is holding back broader economic growth.
COMMERCIAL REAL ESTATE IS HOLDING ITS VALUE
The impact this will have on commercial real estate investments in 2017 and beyond is difficult to predict, but some insights are clear. First, some economists are forecasting a mild recession 12 to 24 months from now, based largely on historic macroeconomic cyclical activity. In the past, such low levels of unemployment were often followed by a mild recession within the same timeframe. However, recessions are typically triggered by excessive speculation, risk-taking, and usually hyper aggressive lending that pushes the economy too far. The data does not show any such excesses, especially in the use of leverage or aggressiveness of lenders. So, such predictions may not come true. Second, the labor shortage is being felt very strongly in the construction services and materials sectors. This means the cost to build new properties is rising faster than market rents and prices can justify. The net result is commercial real estate will probably hold its value just fine, and in fact, appreciate in areas where there is short supply. In conclusion, according to the data, we are probably closer to the middle of the cycle than the end.