Economic Watch: May Job Growth Far Exceeds Expectations

Executive Summary

• The U.S. added 339,000 jobs in May, far exceeding consensus estimates of 190,000. March and April job numbers were revised up by a combined 93,000.
• Professional & business services had 64,000 new hires, followed by government (56,000), health care (52,400), leisure & hospitality (48,000), construction (25,000) and transportation & warehousing (24,200).
• The unemployment rate rose to 3.7%, while the labor force participation rate remained unchanged at 62.6%. Average hourly earnings increased by 4.3% on a year-over-year basis.
• Job growth has remained resilient despite Fed monetary policy tightening. While we expect that the Fed won’t raise rates when it meets this month, additional rate hikes may be necessary later if the economy continues to outpace expectations.
• Elevated interest rates and increased uncertainty about their future direction will continue to suppress commercial real estate activity in the coming months, although some improvement is expected later in the year.

Impacts on Commercial Real Estate

Office

Office-using jobs increased by 74,000 in May, with professional & business services gaining 64,000 and financial activities 10,000. Despite these gains, slowing economic growth will weaken demand for office space.

Industrial

The transportation & warehousing sector gained 24,200 jobs last month, while manufacturing lost 2,000. We expect industrial & logistics fundamentals to remain relatively strong but demand for space may decline as economic activity slows.

Retail

Traditional retail gained 11,600 jobs in May, while food services & drinking places added 33,100. Retail real estate fundamentals remain strong, but we expect that recent interest rate hikes and the restart of student loan payments will lead to less consumer spending and demand for retail space.

Construction

The construction sector added 25,000 jobs in May, nearly all of them in specialty trade contractors. Non-residential building added 4,200 jobs and residential gained only 2,400. New construction activity will remain subdued due to elevated interest rates.

Health Care

Health care gained 52,400 jobs in May. Ambulatory health care (outpatient services) added 23,900, while hospitals gained 19,600 and nursing & residential care 8,900. Long-term demand for health-care properties should remain relatively resilient due to an aging population.

Hotels

Accommodation services added 1,300 jobs in May. Although a slowing economy and reduced consumer spending may impact the hotel sector later this year, pent-up demand for travel likely will continue to support fundamentals over the short term.

Multifamily

A historically strong labor market that supports household formation bolsters the outlook for multifamily real estate. Although challenges to single-family housing affordability should continue to drive demand into multifamily, we expect such demand will soften as the labor market cools in coming months.

The Bottom Line

The 339,000 jobs added in May far exceeded expectations. If this level of job growth continues, the Fed will have to continue raising interest rates.

However, May’s impressive job growth belies other indicators of an economic slowdown: slower wage growth, weaker manufacturing activity and moderating consumer spending. In addition, tighter credit conditions due to recent bank failures have yet to affect the economy.

We still expect that the Fed will pause its interest rate increases when it meets this month and hold them steady before cutting rates later this year. However, the labor market’s surprising strength increases the probability that interest rates will remain elevated, pushing the economy into a deeper recession in the year’s second half.