Economic Watch: Strong May Job Growth Likely Will Keep Fed on Hold

Executive Summary

• The U.S. added 272,000 jobs in May, well above expectations of 190,000. March and April job growth numbers were revised lower by a combined 15,000.
• May’s job gains were broad-based, led by health care, government, leisure & hospitality and professional services.
• The unemployment rate increased by 10 bps to 4.0% and the labor force participation rate ticked down to 62.5%. Average hourly earnings rose more than expected, increasing by 4.1% year-over-year.
• Continued strong job growth in May likely will keep the Fed from lowering interest rates until at least September.
• We expect real estate investment activity to remain subdued, before improving in Q4. However, leasing activity will maintain some momentum amid stronger-than-expected hiring.

Impacts on Commercial Real Estate

Office

Office-using jobs increased by 43,000 in May, with professional & business services adding 33,000 and financial activities gaining 10,000. This job growth supports leasing demand, although an uncertain business environment will remain a headwind.

Industrial

The warehousing & storage sector gained 700 jobs in May, while manufacturing gained 8,000. We expect continued strong demand for industrial space due to a relatively healthy consumer and continued strength in e-commerce.

Retail

Traditional retail gained 12,600 jobs in May, while food services & drinking places gained 24,600. Continued job growth bodes well for retail, although high inflation and depletion of excess savings will have an impact. Nevertheless, fundamentals remain strong amid little new supply.

Construction

The construction sector added 21,000 jobs in May. Despite high interest rates, we expect that construction activity will remain resilient due to fiscal policy and an on-going single-family home shortage.

Health Care

Health care gained 68,300 jobs in May. Ambulatory health care (outpatient services) added 42,700, while hospitals gained 15,000 and nursing & residential care 10,600. We expect that health care will continue to benefit from pent-up demand for medical procedures and an aging population. All of this bodes well for real estate demand in the sector.

Hotels

Accommodation services gained 700 jobs in May. We expect consumers will reduce travel spending as excess savings are depleted.

Multifamily

Multifamily demand should remain strong due to high mortgage costs that make renting a more attractive option. Continued job growth also supports household formation, which will also fuel rental demand.

The Bottom Line

May’s strong job and wage growth likely will keep the Fed from lowering interest rates until at least September. However, we still expect that the economy will further slow and inflation—though sticky—will trend down throughout the year, prompting the Fed to eventually cut rates. We continue to expect a soft landing with the economy avoiding a recession. However, there are risks to this view as interest rates remain higher for longer.

We expect that a combination of slowing economic growth and lower inflation, along with an eventual easing of Fed monetary policy, will result in the 10-year Treasury yield ending the year at 4.1%. This should support increased debt and equity investment activity and improved asset values beginning in Q4. A resilient economy and continued strong labor market will be a tailwind for leasing activity.