Intelligent Investment
Economic Watch: Cooling Labor Market Sets Stage for September Rate Cut
August 2, 2024 3 Minute Read
Executive Summary
- The U.S. economy added 114,000 jobs in July, well below consensus expectations of 185,000. May and June employment growth was revised down by 29,000 jobs.
- July’s gains were largely in health care, construction and retail.
- The unemployment rate edged up 20 basis points (bps) to 4.3% in July. The rate is now up by 90 bps since bottoming at 3.4% in April 2023.
- The labor force participation rate increased to 62.7%. More people entering the job market contributed to the July unemployment rate increase. Average hourly earnings rose by 3.6% year-over-year, the slowest pace since 2021.
- July’s job numbers reflect a labor market that is cooling quickly. This will prompt the Fed to cut rates in September but may be a headwind for commercial real estate leasing.
- The 10-year Treasury yield fell to around 3.8% after today’s news, which may bode well for increased commercial real estate investment activity later this year.
Impacts on Commercial Real Estate
Office
Office-using jobs fell by 5,000 in July. Financial activities lost 4,000 jobs, while professional & business services lost 1,000. Reductions in office-using jobs will weigh somewhat on leasing activity.
Industrial
The warehousing & storage sector gained 10,700 jobs, while manufacturing added 1,000. We expect continued healthy demand for industrial real estate amid relatively resilient consumer spending and e-commerce growth.
Retail
Traditional retail gained 4,000 jobs, while food services & drinking places added 19,500. This bodes well for retail real estate fundamentals, with healthy demand further reducing available supply.
Construction
The construction sector added 25,000 jobs in July despite continued high interest rates. Government incentive programs to support infrastructure and manufacturing bode well for the sector over the near term.
Health Care
Health care gained 55,000 jobs, led by ambulatory services with 26,300 and hospitals with 19,500. Nursing & residential care gained 9,200 jobs. We expect that health care property demand will remain healthy due to the aging U.S. population.
Hotels
Accommodation services gained 6,100 jobs in July. While consumers continue to spend on experiences, we expect that hotel demand will moderate as the economy slows and consumers reduce spending.
Multifamily
Multifamily demand is expected to remain strong as high mortgage costs put home-buying out of reach for many. Continued job growth also supports household formation, which will aid absorption of new rental supply.
The Bottom Line
The U.S. labor market cooled in July as restrictive monetary policy impacts the broader economy. Although slowing job growth is problematic for the employment side of the Fed’s dual mandate, it helps reduce inflation. July’s employment report supports our view that the Fed will begin cutting rates by 25 bps in September.
We expect that the 10-year Treasury yield will end the year near 4%, which will support an increase in commercial real estate investment activity and boost property values. However, the Fed’s current policy stance remains highly restrictive and will remain a headwind for real estate.
