From Barrons-Hiring Surges More Than Expected-Economists reacting to the May jobs report see lower odds of an economic slowdown—and less chance of Federal Reserve interest-rate reductions in 2024.
Going into Friday morning’s report, a streak of weaker-than-expected economic indicators over the past two weeks had prompted some hand-wringing about a softening U.S. economy, with data still solidly in expansion territory but the trend moving in the wrong direction.
Services sectors of the U.S. economy remained the drivers of the jobs growth in May.
Employers added 272,000 nonfarm payrolls in May, according to the Bureau of Labor Statistics on Friday, including 204,000 added by businesses providing services. Goods-producing industries added 25,000 jobs, while federal, state, and local governments added 43,000 payrolls.
Why the Unemployment Rate Rose
The U.S. labor-force participation rate barely changed in May, even as employers added 272,000 nonfarm payrolls and the unemployment rate rose by a tenth of a percentage point. That’s a sign of an increase in the supply of workers in the U.S. economy.
The labor-force participation rate ticked down to 62.5% in May, from 62.7% a month earlier, according to data from the Bureau of Labor Statistics published on Friday. It compares with a post-pandemic high of 62.8%.
The Numbers to Know-The Bureau of Labor Statistics published the May employment report Friday morning. Here are the highlights:
- Employers added 272,000 nonfarm payrolls in May vs. 180,000 forecast, according to FactSet
- April hiring was revised down to 165,000 from 175,000
- March hiring was lowered to 310,000 from 315,000
- The unemployment rate rose to 4% in May from 3.9% in April
- Labor-force participation rate ticked down to 62.5% in May from 62.7% in April
- Average hourly earnings rose 0.4% in May vs. 0.3% forecast
What Economists Said About the Blowout Jobs Report, By Nicholas Jasinski- Economists reacting to the May jobs report see lower odds of an economic slowdown—and less chance of Federal Reserve interest-rate reductions in 2024.
Going into Friday morning’s report, a streak of weaker-than-expected economic indicators over the past two weeks had prompted some hand-wringing about a softening U.S. economy, with data still solidly in expansion territory but the trend moving in the wrong direction.
Wages Grew at the Fastest Rate Since January- Hotter wage growth in May will keep the Federal Reserve focused on its inflation fight, dimming prospects for interest-rate cuts in the foreseeable future.
Americans’ average hourly earnings rose faster than expected in May, up 0.4% from the previous month, according to the Bureau of Labor Statistics on Friday. That was 4.1% higher than a year ago and compared with the consensus estimate of 0.3% growth, per FactSet.
From PasadenaNOW and City News Service: UCLA Forecast: Despite Sub-Standard Economic Growth, US Dodging Recession-Despite economic growth that is expected to continue trending lower than it did during the second half of last year, the nation appears to have dodged the possibility of a recession in 2024, and growth rates are expected to rebound heading into 2025, according to a UCLA forecast released Thursday.
“The oft-predicted but never seen `recession next quarter’ has now faded in the face of expansionary fiscal policy, a new national industrial policy and a consumer who is happy to continue spending,” UCLA Anderson Forecast Director Jerry Nickelsburg wrote in his national economic outlook.
“As inflation slowly works its way back to the neighborhood of 2.2% to 2.7% per annum and is being kept high due primarily to residential rents, automobile repair and new health insurance premia, we expect Fed policy to take a neutral stance and economic growth to rebound to trend rates.”
But Nickelsburg warned of continuing uncertainties — including the November presidential election that could potentially mark a shift in economic policies, and the lingering possibility of a government shutdown.
“These risks are substantial and bear watching as they could well drive the economy off of the current growth path that is predicted to return the U.S. economy to trend 2.5% growth,” he wrote. “Due to those uncertainties, the forecast contains weaker business investment in the third and fourth quarters of this year corresponding to a wait-and-see approach by some firms until after the November election.”
Nickelsburg noted that the last half of 2023 saw the U.S. economy grow much faster than the 2.5% average growth rate seen in recent years. The first quarter of 2024, however, saw growth beneath that trend, and that slowdown is anticipated to continue “for a few more quarters.” But Nickelsburg noted that the slowdown is not necessarily portending a recession, since the economic pace is not due to a contraction in demand leading to a sharp slowdown in GDP growth and loose labor markets.
From CalMatters: Inflation Hits California Families Hardest. It’s Shaping Their Views On The Economy by Dan Walters
On paper, the U.S. economy seems to be doing well with historically low unemployment. Yet most Americans have a sour view in recent polls, with stubborn inflation in living costs cited as the reason for that pessimism.
“As the 2024 general election begins in earnest, voters’ assessment of the economy and of the candidates’ ability to manage it will, as usual, have a strong impact on the outcome of the race,” Brookings Institute stated in a recent analysis of economic attitudes. “With little more than seven months until Election Day, the economy remains a key advantage for former President Donald Trump, and a drag on President Biden’s reelection prospects.”
Biden needn’t worry about losing California to Trump, but it has one of the nation’s highest rates of inflation, according to Moody’s Analytics, worsening its already outlandishly high costs of housing and other living expenses. It’s the biggest factor in California having the highest level of functional poverty of any state, 13.2% according to the U.S. Census Bureau, about 50% higher than the national rate.
The Public Policy Institute of California, using similar statistical methodology, has found that a quarter of Californians are either living in poverty or financially close. More recently, the PPIC has explored the impact of inflation, especially on California families which struggle to pay for housing, food and other necessities.
In 2018–19, PPIC reported, “these necessities cost California’s low-income households about $26,000, on average; by 2024, these households would need to spend over $32,000 on the same goods and services. By comparison, the top income group spent on average $82,000 on these basics in 2018–19, which would now cost nearly $100,000 in 2024.”
The PPIC has found that “prices have increased unevenly across goods and services – with varying effects across households at different income levels. Food prices are up 27% compared to April 2019, and gasoline is up 29%. While expenditures on these goods and services make up large portions of most household budgets, lower-income households spend almost all of their resources (83%) on food, housing, transportation (including gasoline), and health care.”
Obviously those on the lower rungs of the economic ladder have more difficulty adjusting to increases in living costs. It’s not hyperbole to say that inflation is a major reason why so many Californians cannot move up that ladder.
Meanwhile, efforts to curb inflation have a compounding effect. The Federal Reserve System maintains high interest rates to cool off the economy and bring down inflation, but those interest rates make home ownership more difficult and affect businesses, which often raise the prices of goods and services to maintain profits.
Inflation also hits the public sector, increasing the costs of providing services and wreaking havoc on state and local government budgets. It’s one of the reasons the state budget suffers from a massive deficit and why many cities, counties and school districts are struggling to balance their budgets.
By happenstance, the PPIC issued its report on inflation on the same day that BravoDeal, a website devoted to helping consumers find bargains, released its study of fast food prices, comparing four popular chains state-by-state.
Overall, fast food outlets in Mississippi had the lowest prices while those in Hawaii were the highest, followed by New York, New Jersey and California.
For example, a McDonald’s Big Mac costs an average of $5.11 in California but just $3.91 in Mississippi.
CalMatters.org is a nonprofit, nonpartisan media venture explaining California policies and politics.
From the Associated Press: An inflation gauge closely tracked by Federal Reserve rises at slowest pace this year.
A price gauge closely tracked by the Federal Reserve cooled slightly last month, a sign that inflation may be easing after running high in the first three months of this year.
Friday’s report from the Commerce Department showed that an index that excludes volatile food and energy costs rose 0.2% from March to April, down from 0.3% in the previous month. It was the mildest such increase so far this year.
Measured from 12 months earlier, such so-called “core” prices climbed 2.8% in April, the same as in March. Overall inflation increased 0.3% from March to April, the same as in the previous month, and 2.7% from a year earlier, also unchanged from March’s figure.
The latest figures could provide some tentative reassurance for Fed officials, who aggressively raised interest rates to fight inflation, that price pressures are easing. Chair Jerome Powell has said he expects inflation, after picking up in the first three months of 2024, to resume cooling in the coming months. Powell has cautioned, though, that the central bank needs “greater confidence” that inflation is sustainably slowing before it would consider cutting rates.
The Fed tends to favor the inflation gauge that the government issued Friday — the personal consumption expenditures price index — over the better-known consumer price index. The PCE index tries to account for changes in how people shop when inflation jumps. It can capture, for example, when consumers switch from pricier national brands to cheaper store brands.
Inflation fell sharply in the second half of last year before sticking well above the Fed’s 2% target in the first few months of 2024. With polls showing that costlier rents, groceries and gasoline are angering voters as the presidential campaign intensifies, Donald Trump and his Republican allies have sought to heap the blame on President Joe Biden.
Friday’s report also showed that income growth slowed and spending cooled sharply in April, a trend that could help moderate economic growth and inflation in the coming months and potentially please the Fed.
Adjusted for inflation, after-tax incomes fell 0.1% in April, the second such drop this year. Consumer spending also declined 0.1% when adjusted for inflation, a sign that economic growth may remain modest in the current April-June quarter. The Fed will likely see such data as evidence that the economy is cooling in a way that could restrain inflation later this year.
Many Americans, particularly lower-income workers, have been pulling back on spending as they struggle to keep up with rising expenses, leading some businesses to rein in prices. In recent weeks, chains including McDonald’s, Target and Walmart have announced price reductions or temporary discount deals.
Grocery prices eased last month, according to Friday’s report, though they’re still up significantly from before the pandemic. The prices of long-lasting goods also dropped, led by less expensive new and used cars, furniture and appliances. The cost of used cars has declined nearly 5% over the past year.
Gas prices, though, jumped 2.7%, just from March to April. Likewise, the costs of many services rose faster than the Fed would like. Restaurant meals, for example, increased 0.3% from March to April and are up 4% from a year earlier. Entertainment prices, including for movies and concerts, jumped 7.4% from 12 months earlier.
In the past couple of weeks, a stream of remarks by Fed officials have underscored their intention to keep borrowing costs high as long as needed to fully defeat inflation. As recently as March, the Fed’s policymakers had collectively forecast three rate cuts this year, starting as early as June. Yet Wall Street traders now expect just one rate cut this year, in November.
One influential Fed official, John Williams, president of the Federal Reserve Bank of New York, said Thursday that he expects inflation to start cooling again in the second half of the year. Until it does, though, Powell has made clear that the central bank is prepared to keep its key rate pegged at 5.3%, its highest level in 23 years.
But Williams expects inflation, according to the Fed’s measure, to cool only slightly by year’s end, to a 2.5% annual pace. He doesn’t foresee it dropping to the Fed’s 2% target until next year.
The central bank raised its benchmark rate from near zero to its current peak in 15 months, the fastest such increase in four decades, to try to conquer inflation. The result has been significantly higher rates for mortgages, auto loans and other forms of consumer and business borrowing.
In Europe, inflation rose unexpectedly in May to a yearly rate of 2.6% from 2.4%, according to official figures released Friday, in a sign that rising prices haven’t yet been fully tamed in the 20 countries that use the euro. Still, the European Central Bank is likely to proceed with an interest rate cut at its meeting next week.
Also from the AP: US economic growth last quarter is revised down from 1.6% rate to 1.3%, but consumers kept spending.
The U.S. economy grew at a sluggish 1.3% annual pace from January through March, the weakest quarterly rate since the spring of 2022, the government said Thursday in a downgrade from its previous estimate. Consumer spending rose but at a slower pace than previously thought, a sign that high interest rates and lingering inflation are pressuring household budgets.
The Commerce Department had previously estimated that the nation’s gross domestic product — the total output of goods and services — expanded at a 1.6% rate last quarter.
The first quarter’s GDP growth marked a sharp slowdown from the vigorous 3.4% rate in the final three months of 2023.
But last quarter’s pullback was due mainly to two factors — a surge in imports and a reduction in business inventories — that tend to fluctuate from quarter to quarter. Thursday’s report showed that imports subtracted more than 1 percentage point from last quarter’s growth. A reduction in business inventories took off nearly half a percentage point.
By contrast, consumer spending, which fuels about 70% of economic growth, rose at a 2% annual rate, down from 2.5% in the first estimate and from 3%-plus rates in the previous two quarters. Spending on goods such as appliances and furniture fell at a 1.9% annual pace, the biggest such quarterly drop since 2021.
Still, services spending rose at a healthy 3.9% clip, the most since mid-2021. And an uptick in business investment, led by housing, software and research and development, added more than 1 percentage point to first-quarter annual growth.
and: US consumer confidence rises in May after three months of declines.
Consumer confidence in the U.S. rose in May after three straight months of declines, though Americans are still anxious about inflation and interest rates.
The Conference Board, a business research group, said Tuesday that its consumer confidence index rose in May to 102 from 97.5 in April. Analysts were expecting the index to decline again.
The index measures both Americans’ assessment of current economic conditions and their outlook for the next six months.
The measure of Americans’ short-term expectations for income, business and the job market climbed to 74.6 this month from a dismal 68.8 in April. A reading under 80 can signal a potential recession in the near future.
Consumer expectations of a recession in the next year rose again in May but are still well below their peak in May of 2023. More than two-thirds of respondents to the survey said they believe a recession is “somewhat” or “very” likely in the next 12 months. That’s in contrast to the Conference Board’s survey of CEOs, only about a third of whom foresee a recession in the next 12 to 18 months.
From the New York Times: Office Building Losses Start to Pile Up, and More Pain Is Expected-The distress in commercial real estate is growing as some office buildings sell for much lower prices than just a few years ago. By Joe Rennison and Julie Creswell
Since the early days of the pandemic, owners of big buildings in New York and other large cities have been desperately hoping that the commercial real estate business would recover as workers returned to offices.
Four years on, hybrid work has become common, and the strain on property owners is intensifying. Some properties are going into foreclosure and being sold for sharply lower prices compared with valuations from less than a decade earlier, leaving investors with steep losses.
While the number of office buildings reaching critical stages of distress remains small, the figure has increased sharply this year. And investors, lawyers and bankers expect the pain to grow in the coming months because demand for office space remains weak and interest rates and other costs are higher than they have been in many years. The problems could be especially severe for older buildings with lots of vacant space and big loan repayments coming up.
The repercussions could extend far beyond the owners of these buildings and their lenders. A sustained drop in the value of commercial real estate could sap property tax revenue that cities like New York and San Francisco rely on to pay salaries and provide public services. Empty and nearly empty office buildings also hurt restaurants and other businesses that served the companies and workers who occupied those spaces.
“There is a lot more trouble coming,” said Mark Silverman, a partner and leader of the CMBS Special Servicer group at the law firm Locke Lord, who represents lenders in disputes with commercial mortgage borrowers. “If we think it’s bad now, it’s going to get a lot worse.”
Assessing the scale of the problem has been challenging even for real estate professionals because of the different ways in which commercial buildings are financed and the varying rules about what must be disclosed publicly.
Roughly $737 billion of office loans are spread across large and regional banks, insurance companies and other lenders, according to CoStar, a real estate research firm, and the Mortgage Bankers Association.
The delinquency rate for office building loans that are part of commercial mortgage-backed securities was nearly 7 percent in May, up from about 4 percent a year earlier, according to Trepp, a data and research firm. But only a small proportion of office loans, about $165 billion, are packaged into such securities.
Foreclosures, which can take place months or more than a year after a property owner falls behind on payments, are also climbing. Nearly 30 buildings in Dallas, New York City, San Francisco and Washington whose loans are part of commercial mortgage-backed securities were in foreclosure in April, up from a dozen in early 2023, according to Trepp.
Some buildings around the country have recently been sold for a fraction of their prepandemic prices.
In May, investors like insurance companies and banks in the top-rated, triple-A bond of a commercial mortgage-backed deal — generally considered to be nearly as safe as a government bond — lost $40 million, or about 25 percent of their investment. Holders of lower-rated bonds from the same commercial mortgage deal lost all of the $150 million they had invested.
Office leases tend to last as long as 10 years to give property owners time to recoup their investment and broker fees. Long leases also assure investors that they will be paid interest on the hundreds of millions of dollars — sometimes even $1 billion — that they have lent to real estate developers.
As a result, it can take a long time before decisions by tenants to downsize affect the market. In addition, some mortgages struck at low interest rates haven’t yet had to be refinanced. But the longer interest rates remain elevated, the more buildings that were profitable when interest rates were close to zero might run into trouble.
Then there is the slow process of negotiation between borrowers and lenders as they look for ways to reduce potential losses by renegotiating or extending loans.
Part of the delay has also come from the difficulty of valuing buildings after the pandemic. Until enough properties are sold, it has been hard to know the true market value of buildings.
“A lot of that stuff at the moment is just spreadsheet math because there isn’t the transaction activity to prove it out,” Mr. Paolone said.
The sales that have taken place suggest a severe decline in commercial property values.
This spring, a 1980s-era office building at 1101 Vermont Avenue in Washington sold for $16 million, a sharp drop from its $72 million valuation in 2018. And near the Willis Tower in Chicago, an investor snapped up a landmark building late last year at 300 West Adams Street for $4 million that sold for $51 million in 2012.
Some data suggest the pain is concentrated in a small proportion of buildings. While vacancy rates in U.S. office buildings are around 22 percent, roughly 60 percent of that vacant space was in 10 percent of all office buildings nationwide, according to Jones Lang LaSalle, a commercial real estate services firm, suggesting that the problems are concentrated rather than widespread.
Another hopeful sign, analysts said, was that the problems of office buildings did not seem to be endangering banks. After the failures of Silicon Valley Bank and First Republic Bank last year, some investors had feared for the health of other regional banks, which are big lenders to the commercial real estate industry. But few of the commercial mortgages held by banks have become delinquent, according to the Commercial Real Estate Finance Council.
Also largely unaffected by the situation are newer trophy buildings in New York that are able to command rents of as much as $100 a square foot, double what older buildings can charge, according to the office of the New York City comptroller.
The problem is most acute for building owners whose mortgages are coming due and who are losing many tenants. About a quarter of existing office property mortgages held by all lenders and investors, or more than $200 billion, are set to mature this year, according to the Mortgage Bankers Association and CoStar.
And while investors have been willing to lend new money to owners of warehouses or hotels, few want to refinance office loans.
That could spell the end of a tactic often referred to as “extend and pretend,” which became popular in recent years. It is called that because lenders agree to extend mortgages in the hopes that, given more time, building owners will be able to attract more tenants.
That approach stemmed partly from the hope among landlords and lenders that the Federal Reserve, after ratcheting up interest rates over the last two years, would ease or cut rates relatively quickly. In recent months, most economists and Wall Street traders have concluded that the Fed will not rapidly lower its benchmark rate or return it to the extremely low levels in place before the pandemic.
Another hope widely held in the real estate industry was that more companies would require employees to return to the office more frequently — but that has also not panned out.
Law firms and the finance industry have slightly increased the office space they have leased from prepandemic levels, but many other industries have scaled back. As a result, new leases signed are down about 25 percent from 2019 as measured by square feet, according to Jones Lang LaSalle.
Over the course of a full week, roughly half of New York office workers on average are going to offices, according to Kastle Systems, which tracks how many employees swipe their ID badges at commercial buildings. That is roughly in line with the national average.
The numbers exemplify the smaller role offices now play in many white-collar Americans’ lives. That shift comes at a time when the U.S. economy is healthy, suggesting that the problems in the office market may not pose a systemic risk to the financial system.
But property owners, their lenders and others connected to commercial real estate remain under pressure.