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Economy United States | April 26, 2017 Economic Insight The truth about the labor market Quick take • Housing market data gets stronger • The labor market gets tighter with each passing week • Investment markets wonder if the new administration can stimulate the economy • There’s slim risk of a government shutdown • We expect first quarter economic growth to be disappointing workers are located in the wrong geographical areas, such as smaller rural areas with struggling local economies. But unfilled jobs are a sign of labor scarcity, increased competition for workers with in-demand skills, and rising wages. The commercial real estate industry would fare better if these positions were filled: newly employed workers in retail centers and office buildings spend money, creating demand for goods in retail centers and industrial buildings. Some will rent apartments, and many will go on vacation and stay in hotels. The housing recovery continues More than ever, it appears the economy is at full employment. Both (for-sale housing and the apartment market) can perform well at the same time. Last week the number of Americans on unemployment rolls fell to a 17-year low. Initial unemployment claims came in below 300,000 (an unofficial indicator of a healthy labor market) for the 111th straight week. That’s the longest streak since 1970 when the labor market was much smaller, making this an impressive feat. More than ever, it appears the economy is at full employment with the unemployment rate at 4.5 percent, its lowest level since May of 2007. This means that virtually all cyclical unemployment – the share of unemployment that varies with the ups and downs of the economic cycle – has been eliminated. What remains is structural unemployment, the absence of demand for certain workers, and frictional unemployment, the normal turnover in the labor market as workers change jobs or spend time seeking out new jobs. So today’s unemployed are either “between jobs” or have skills that are not in demand in the labor market. But the idea that the overall labor market isn’t strong is just a myth. There are currently about 5.6 million open positions in the U.S. Some of the unemployed don’t have the appropriate skills: these workers’ skills have been replaced by automation and trade and they have not retrained for another career. Jobs that match these skills have been disappearing for decades and there seems to be virtually nothing anyone can do to bring those jobs back. Some The housing market index (HMI) in the homebuilders’ survey declined slightly in early April, but homebuilders’ confidence remained at elevated levels because of the strong interest in homeownership from buyers and potential buyers. Housing starts for March were down slightly from February, but February’s figures were inflated by warmer-than-average temperatures. We see this as just a short-term blip: housing permits exceeded expectations in March, reflecting that homebuilder confidence. Underpinning all of this, the upward trend in home sales continues. Existing home sales surged in March to the highest annualized rate since February of 2007, despite the lack of inventory for sale. Although the data for new home sales for March is likely to show a decline versus February’s weather-inflated figures, new home sales are also trending upward. All of this occurring despite higher residential mortgage rates, demonstrating that homeownership in the U.S. is not dead. The homeownership rate appears to have stabilized during 2016. Ongoing sales activity this year will likely confirm that. But as we have mentioned before, forsale housing should not be seen as the enemy of the apartment market. Not only do demographics still favor the rental market, but for-rent and for-sale housing are more complementary than competitive. Both can perform well at the same time. Economic Insight | United States | April 26, 2017 2 The President also signed two memoranda that could possibly signal the first salvos against Dodd-Frank, even without outright repeal. The first looks at how the government would take over a failing bank and resolve its affairs. Some see this as an automatic bailout. The second concerns the Financial Stability Oversight Council, a group of regulators responsible for macro-oversight of the financial system. Some feel that this council is unaccountable. Secretary Mnuchin is already operating under an executive order that requires him to report on easing regulatory burdens. He has said that he will submit the report in June and that it would contain both possible changes in regulation and possible changes to legislation. Ultimately, the administration (much like the previous administration) is resorting to executive orders and memoranda to implement its economic agenda and stimulate the economy because it struggles to get legislation through Congress. Losing faith? All of these orders come at a time when the administration could use some good news. It appears as if the markets are losing faith in the administration’s economic agenda. Or, at a minimum, the markets have come to realization that it is going to be more difficult for the administration to enact its economic agenda and have an impact on the economy. 2.70 2,400 2.50 2,300 2.40 2,250 2.30 2.20 2,200 2.10 2,150 Treasury Yield (%) 2.60 2,350 S&P 500 (L) 12-Apr-2017 29-Mar-2017 15-Mar-2017 1-Mar-2017 15-Feb-2017 1-Feb-2017 18-Jan-2017 4-Jan-2017 21-Dec-2016 7-Dec-2016 2.00 9-Nov-2016 The other executive order signed last week concerned identifying and reducing tax regulatory burdens. The order will require the Treasury Department to identify and lessen burdens from tax regulations issued in 2016. This could be the first step toward tax reform, but as we have previously discussed, tax reform is likely to be a long, complicated process that now looks likely to have little, if any, impact on the economy in 2017. Trump rally losing steam? 23-Nov-2016 On the policy side last week, the President continued to sign executive orders while Congress was in recess. The first was the “Buy American, Hire American” order. Key among the provisions in this order was the directive altering the annual H1-B visa lottery to allocate guestworker visas to the “most skilled or highest-paid applicants.” The H1-B visa program has critics on the left and the right and the program is rife with offshoring abuse. Reform could benefit both the economy and the labor market and potentially reduce the number of unfilled positions. We don’t expect the “Buy America” provision for iron and steel in federal water projects to have a huge impact on the economy . Since March, both the Treasury market and the equity market have either reversed course or paused, sensing that the combination of tax reform/tax cuts, infrastructure spending, and deregulation is faltering. S&P 500 Index Let’s not forget about policy Ten-Year Treasury Yield (R) What we are watching this week This will be an eventful week for the economy. A government shutdown looms on April 29th. Although a shutdown is not the likeliest scenario, there’s more potential than last week when budget director Mick Mulvaney warned that “elections have consequences.” He suggested that if the President didn’t get his defense spending and border wall in the budget, then federal payments for things like insurance under the Affordable Care Act could be cut from the spending bill. This is important because the budget likely can’t pass without Democratic support so cutting spending they deem vital would kill any hope of passing spending legislation. And many Republicans are opposed to increased defense spending and the border wall. Stay tuned. commercial real estate does not explicitly need faster economic growth to continue strong performance. © 2017 Jones Lang LaSalle IP, Inc. All rights reserved. All information contained herein is from sources deemed reliable; however, no representation or warranty is made to the accuracy thereof. Economic Insight | United States | April 26, 2017 3 Also out this week is the first estimate of first quarter GDP. We expect to see that GDP growth struggled during the first quarter and will come in below the average growth rate during the expansion of about 2 percent. This would keep with the pattern of recent years, with the economy struggling to start the year. Any weakness will likely represent a temporary blip and precede stronger growth in later quarters. However, a weak reading would concern many who anticipated faster economic growth under the new administration. Realistically, it appears as if the economy will continue to perform on par with recent expectations until any policy changes alter its course. The good news is that commercial real estate does not explicitly need faster economic growth to continue strong performance. Faster economic growth would be heartening, but it is certainly not necessary. Thought of the week The ratio of market capitalization of the S&P 500 Index to U.S. nominal GDP recently edged above 1.1%. The last time the ratio was that high was in 2000 before the stock market bubble burst. Ryan Severino, CFA Chief Economist +1 732 590 4182 [email protected] © 2017 Jones Lang LaSalle IP, Inc. All rights reserved. All information contained herein is from sources deemed reliable; however, no representation or warranty is made to the accuracy thereof.