Research - MARCH 7, 2014

Unemployment rate hangs steady, but labor participation rate at 35-year low

by Reg Clodfelter

The Bureau of Labor Statistics released its monthly unemployment report with February’s job numbers today, reporting that the unemployment rate increased by a mild 0.1 percent since January to 6.7 percent. Net nonfarm employment increased by 175,000 in February, just below the prior 12-month average of 189,000. The net employment gains reported by the BLS are more positive than those released by ADP for February, with ADP reporting a gain of only 139,000 for the month.

But the gross numbers paint a more interesting picture. Business and professional services employment, which increased by 79,000 jobs in February, has been strong for the past four years now, seeing an average of 50,000 jobs added per month since February 2010, according to Jeff Bean, senior research analyst with LaSalle Investment Management. Construction employment, which only rose by 15,000 jobs in February, should bounce back and perform well through the year.

“Despite the down month, construction added 50,000 jobs in January and will be a bigger contributor in the coming year as home building picks up,” Bean adds.

On the other end, information employment declined by 16,000 jobs in February, though the industry is typically volatile from month to month. The public sector changed little in the month, though it has been posting net losses in job growth — a trend expected to continue — with government payrolls down 29,000 jobs in January and down 51,000 jobs since September 2013, according to Bean’s research.

Employment growth, as seen in the fall in unemployment from 7.9 percent at the end of 2012 to 6.7 percent in February 2014, will certainly be a positive for real estate investment, starting with the residential market.

“The number one thing to be watching is the rebound and improvement in the housing market,” says Jacques Gordon, global investment strategist at LaSalle Investment Management. “Employment growth is, generally, a very positive trend for residential property, both rental and owner-occupied, as job stability leads to more home buying, apartment renting and household formation.”

The growth in the residential market, Gordon goes on to explain, is generally followed by corresponding growth in the retail sector. “Strong momentum in the residential market filters over very nicely to shopping, consumption and consumer confidence, and eventually leads to absorption and rental rate increases for shopping centers,” he says.

The growth in retail sales will, naturally, lead to a growth in demand for industrial/logistics properties. A rise in economic activity of all kinds, including job growth, certainly has a positive correlation with hotel demand as well. The only property sector not expected to benefit greatly from job growth, Gordon explains, is offices — not because jobs aren’t being added there (they certainly are) but because companies are placing a premium on maximizing the current space.

“As you relate job growth to positive office market dynamics, it’s not a direct link. We would say that, at best, it keeps the office market stable,” Gordon continues.

But, unfortunately, the decline in the unemployment rate is not only about job growth. The labor force participation rate, measured by the percentage of people 16 years old and older who are either working or looking for work, has declined to its lowest level since 1978. Furthermore, the rate is down from 66.4 percent in 2007 to around 63 percent today, with each percentage point representing roughly 2 million people.

“We expect to see unemployment continue to decline over 2014, but we don’t expect it to be anywhere near as dramatic as in 2013,” Bean says. This is because the labor force participation rate is so low that any downward movement going forward will need to largely be the result of job gains and not of people dropping out of the labor force.

Furthermore, as the economy improves, more and more people who have dropped out of the labor force will begin looking for work again, counteracting some of the fall in unemployment. “We think the LFP rate is going to bounce back, and when that happens, it’s going to put some upward pressure on the unemployment rate, ironically, even though the economy is improving,” Bean continues.

Despite the slight uptick in February, positive economic prospects should lead to a steady, modest decline in the unemployment rate through 2014. This is reflected in Moody’s Analytics’ fourth quarter 2014 unemployment forecast of 6.3 percent, and Oxford Economics’ forecast of 6.4 percent.

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