Download JLL Economic Insight | 2017

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skills: these workers’ skills have been replaced by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.