Economic Watch: Job Growth Slows in April; Labor Market Remains Strong

Executive Summary

• The U.S. added 175,000 jobs in April, well below expectations of 240,000. Revisions to February and March new job numbers resulted in 22,000 fewer than originally reported.
• April job gains were led by the private education & health services sector, followed by transportation & warehousing and retail.
• The unemployment rate increased by 10 basis points (bps) to 3.9%, while the labor force participation rate held steady at 62.7%.
• Average hourly earnings rose by 3.9% year-over-year, less than expected and lower than in March. This deceleration in wage growth bodes well for inflation.
• April’s hiring slowdown boosts our expectation that the Fed will begin to cut the federal funds rate as soon as July, leading to increased commercial real estate investment activity later in the year.

Impacts on Commercial Real Estate

Office

Office-using jobs increased by 2,000 in April, with financial activities gaining 6,000 and professional & business services losing 4,000. While we continue to expect relatively subdued demand for office space amid an uncertain business environment, a resilient economy will be a tailwind.

Industrial

The warehousing & storage sector gained 7,600 jobs last month, while manufacturing gained 8,000. We continue to expect healthy demand for industrial space amid a slowdown in construction starts.

Retail

Traditional retail gained 20,100 jobs in April, while food services & drinking places gained 6,600. Continued economic growth should keep consumer spending relatively healthy, although inflation remains a headwind for now.

Construction

The construction sector added 9,000 jobs in April. We expect construction to remain resilient despite high interest rates, thanks to fiscal policy and an ongoing single-family home shortage.

Health Care

Health care gained 56,200 jobs in April. Ambulatory health care (outpatient services) added 33,400, while hospitals gained 13,500 and nursing & residential care 9,300. We expect that health care will continue to benefit from pent up demand for medical procedures and an aging population. This bodes well for real estate demand in the sector.

Hotels

Accommodation services gained 1,200 jobs in April. While we expect consumers will continue to spend on travel, such spending should moderate as excess savings are drawn down.

Multifamily

Continued job growth supports household formation, which will aid in absorption of new multifamily supply. As such, we expect that demand for apartments will remain healthy.

The Bottom Line

April’s deceleration in job and wage growth is a manifestation of the slowdown we have been forecasting. However, we continue to believe that the U.S. will sidestep a recession. We expect that as inflation moderates, the Fed will begin to cut rates as soon as July.

As tight monetary policy continues to cool the economy, we expect the benchmark 10-year Treasury yield will fall to 4.1% by year-end. This will help support commercial real estate values and investment activity later this year. Continued economic growth will be a tailwind for office and industrial leasing, although occupiers will remain challenged by an uncertain business environment.