JOB GAINS SLOW, BUT REMAIN SOLID–HERE’S WHAT IT MEANS FOR HOUSING
Ask any real estate professional about the macroeconomic challenges they’re facing today, and you’ll get an answer including both “inflation” and “interest rates.” As the former one grows, the latter does, too.
The Federal Reserve’s latest meeting on July 27 saw the board raise interest rates another 25 basis points. This came despite them pausing rate hikes the previous month and inflation falling to 3%, its lowest level in two years. Want a sense of when these hikes might finally end? Look to the labor market. Fed Chairman Jerome Powell has stated that constraining wage growth in line with 2% inflation is a top priority.
According to the latest report from the Bureau of Labor Statistics, covering July 2023, the labor market continues to slow down. As with June, job gains fell short of economist expectations–187,000 compared to the forecasted 200,000. Job growth has previously been lower than expected in June and July offered the lowest level of job growth since December 2020. However, the unemployment rate fell to 3.5%, falling slightly both from the previous month and economist expectations (both 3.6%).
NAR Chief Economist Lawrence Yun explained this dichotomy in a reaction to the report:
“There have been steadily fewer job openings, standing at 9.6 million recently compared to 12 million two years ago. It is still the case nonetheless of more help wanted signs than the 5.8 million Americans who are searching for a position. The labor shortage therefore continues. The count of those who are not in the labor force rose a bit in the past month. This is the reason why the unemployment rate fell even with slowing job creation. More importantly, this is why the number of those not in the labor force remains stubbornly high, with around 5 million more not searching for work compared to pre-Covid levels.”
The job sector with the highest gain was health care, which saw an increase of 63,000 jobs. Increases were also seen in social assistance (24,000), finance (19,000)–12,000 in the real estate sector–wholesale trade (18,000), and the public sector (15,000). Industries which saw declines included manufacturing and transportation.
The construction industry saw a continued upward trend with 19,000 jobs added – slightly higher than average monthly gain of 17,000. This reflects reports of increased builder confidence and demand for new homes.
Wages grew slightly, rising 0.4% month over month and 4.4% year over year. Economists had forecasted 0.3%/4.2% growth. Wage growth presents a double-bind for housing. On one hand, slowing wages are generally considered a sign that efforts to constrain inflation are working, which will in turn bring down interest rates. However, affordability remains a challenge for prospective homebuyers; less money in people’s pockets will do nothing to alleviate that.
Yun offered a perspective and forecast based on this wage growth data:
“The wage rate rose by 4.4% to an average of $33.74 an hour. With consumer price inflation running at 3%, it marks an improvement in the standard of living for working Americans. It is a nice turn after two years of falling living standards when inflation was eating more of a paycheck. The economy is chugging along but is certainly not robust. It could turn into a job-cutting recession if the Fed continues to raise interest rates. If the Fed decides to halt the rate increases, then the housing sector can grow and provide a cushion for the economy.”
Reuters reports that markets are now betting that the Fed’s July rate hike will be the final one. However, the Fed’s decision will be contingent on subsequent inflation levels and the August employment report, according to Nationwide Chief Economist Kathy Bostjancic.
Whether the labor market can reach levels that satisfy the hawkish Powell by August remains to be seen.