Welcome to my newsletter!
Sunshine Corner is SRR Consulting’s bi-monthly newsletter with updates, news, and Sara's views on the US economy and commercial real estate.
Issue 2024:8
SRR Consulting is back from holiday to cover the good and not-so good news from the June 2024 jobs report and how to follow employment by industry to track real estate demand.
Let’s get into it.
The Good News!
The US Employment Situation as of June 2024 is healthy.
US payroll employment increased by 206,000 jobs, compared to 218,000 in the previous month. The three-month trailing average job change is 177,300 jobs and the year-to-date average through June is 222,300 jobs per month.
Other positive indicators from the payroll survey include steady hours worked, an uptick in hourly earnings, and a higher diffusion index. The diffusion index measures the balance between industries with rising and falling employment such that a reading of 50 means half the industries are expanding employment and the other half are reducing employment. In June, the diffusion index rose to 59.6, from 56.4 in May, showing that more industries are adding employees.
The unemployment rate ticked up to 4.1% in June 2024, from 4.0% in May. Over the past 32 months, the unemployment rate has been below 4.5%, for the longest period of low unemployment since the 1960s. The labor force participation rate also increased by 10 basis points (bps), to 62.6% in June.
Labor force participation rate refers to the share of people employed and unemployed as a percentage of everyone able to participate in the civilian labor force. In June 2024, 126,000 people joined or reentered the labor force to look for employment. This is considered an increase in unemployment for “good reasons” by economists because joining the labor force implies confidence about finding employment.
The Not-so Good News.
The speed at which the unemployment rate increases is a known flag for recession and a 50-bps increase in one year is quite fast.
The Sahm Rule is a coincident recession indicator that compares the trailing three-month average unemployment rate (currently 4.0%) to the lowest three-month average over the trailing year (3.57%). Historically, when the difference between these two averages is 0.50 or higher, the US has been in a recession.
As of June 2024, the Sahm Rule indicator is 0.43, which is not great news.
Labor force growth is a good reason for the unemployment rate to edge higher, but only if those (re)entering the labor force find jobs and the unemployment rate improves. SRR Consulting will watch the data comein over the next couple months to see where the labor market goes from here.
As noted in Issue 2024:6, SRR Consulting expects the Fed to cut interest rates if the unemployment rate increases quickly.
Jobs Drive Real Estate Demand.
Job and income growth are positives for both residential and commercial real estate demand. New jobs, promotions, and raises fuel the housing market and consumer spending.
Commercial real estate can be broken into 15 key property types and many of these have additional subtypes. The Q1 2024 SRR Real Estate Quarterly examines these 15 types and pulls from them a core list of four major property types – logistics, multifamily, primary office, and strip retail – which account for 98% of Expanded NPI market value.
The drivers of demand for each property type and subtype differ. In general, positive job growth is good for real estate, but factors impacting the tenants who occupy each type of building also affect real estate performance.
SRR Consulting breaks down payroll employment growth into sectors that improve understanding of tenant trends for the real estate market.
Office property is amid a structural adjustment to technology and the weak job performance in finance and professional services (aka office employment) will not help. Industrial and logistics services employment is weak as well but improving from flat employment year-over-year in January 2024.
Health services employment expanded the most over the year ending June 2024, followed by building construction and services. Both these industries have expanded at a steady pace since 2023, implying more buildings being completed and steady demand for medical office, life science, and senior housing properties ahead. For supply, job growth is not a perfect indicator of property types and locations, but further real estate research can answer those questions.
Thanks for reading!
Fun Facts: Sunshine marks the start and end of each day and illuminates the moon to mark the start and end of each month. New data covering the economic and demographic drivers of real estate performance are released at differing monthly and quarterly cadences such that an important data release occurs at least once a week. It is chaos. To build this newsletter's calendar, I chose to follow sunshine and release this newsletter twice per month, at the start (new moon) and end (full moon) of a lunar month. Problem solved. 🌞