The May jobs report came in at an a dismal 38,000 new jobs; most cited the strike by Verizon, which accounted for 35,000 less jobs, however, even if one were to add those back in, 73,000 is a far cry from a healthy figure.
Early 2016, I mentioned 200,000+ new jobs on a monthly basis was not going to be sustained, however, sub 100,000 creates concerns regarding the health of the US economy. The charts below help dig beneath the surface of the May report and the downward revision to the April report.
The first chart is the month-over-month change in employment by sector while the second chart is a three month average to account for one-offs. The May chart shows a decline in construction (in the midst of construction season), a decline in manufacturing (no surprise), and a decline in information (Verizon related). The decrease information, extracting Verizon, comes as a surprise as it may mean a consolidation in technology as valuations have begun to suffer.
The most worrisome datapoint is the continued decline in labor force; the unemployment rate tumbled to 4.7%. The drop in May was most likely driven by people giving up their job search; about half a million people dropped out.The confusing aspect of this is one would expect a larger increase in wages given a decrease in qualified workers, however, wage growth remains just above inflation at 2.5%. (Econ 101 says a decrease in labor supply and continued increase in demand suggests the input cost (wages) have to increase).
Additionally, the labor force participation rate, which was increasing, gave up most of it’s gains and fell to a near-low at 62.6%.
Correlation to Housing
With the recent job cuts across the financial sector (refer to almost all banks) in middle management jobs as well as trading desks, generally mid-to high six figure salaries, there is cause for concern among developers and brokers amongst the luxury market (lets say $1.3M+ in Chicago and $4M+ in NYC). The typical buyer pool of luxury homes in Lincoln Park, Lakeview…etc in Chicago are usually bought by bankers, money managers, CFOs, doctors…etc. With job cuts and slower growth amongst firms highly correlated with the Federal Reserve, the lack of revenue has led to pink slips as well as a more cautious approach to business practices.
Jonathan Miller of Miller Samuels has already published numerous data points providing factual data in regards to the slowdown in the high-end luxury market in NYC, and we’re beginning to see this in Chicago. A look through the amount of new construction homes built in 2015 show those same homes continue to cut prices and attempt to sell off as their construction loans come due. Traffic to higher end homes in Chicago continues to slow for two potential reasons:
-Buyers are pushing back against the high run up in prices as their affordability has not increased at the same rate as prices
-Slow/discouraging growth in the economy based on labor markets and GDP, combined with a rising cost of living, education, and gasoline is offsetting the higher savings rate economists reported over the trailing 12 months
Without sustained encouraging data, the latter half of 2016 and early 2017 may be a turning point in discouraged home buyers and provide further tenant pools for the apartment market. However, home builders usually trail the business cycle, thus, home buyers may have more negotiating power when it comes to condos and single family homes, but all this is dependent on growth in the US and abroad. Keep an eye on employment and consumer data as it will be closely watched by the Federal Reserve as it looks to raise rates again.