The U.S. economy is finally nearing its potential. Absent the weather-induced first-quarter flop, real GDP growth has averaged 3.0% since the second quarter of 2013. For perspective, the current rate of growth exceeds the average 2.6% GDP growth rate from 2005 to 2007 – commonly referred to as the last real estate boom. The momentum is continuing. Over the last two weeks we have learned that auto sales surged to an eight-year high, existing-home sales reached a two-year high and consumer confidence registered a six-year high. Real GDP is tracking somewhere between 3% and 4% in the second quarter and is expected to hit similar levels in the second half of the year.
The latest employment reports reflect the economy’s strength. In June, the economy created 288,000 net new jobs (nonfarm), according to the Bureau of Labor Statistics (BLS), easily beating the consensus forecast of 210,000. The figures for April were revised upward by 101,000 while those for May were revised downward by 58,000. That means that 43,000 more jobs were added to the employment base during those two months than originally reported. In fact, the last five-month period is the strongest stretch of job creation since a brief period in 2005 – one has to go back to the late 1990s to find stronger numbers. The ADP employment report for June (released the day before the BLS data) shows the job gains were broad based across all company sizes: small (1-49 employees), medium (50-499) and large (500+).
The details in the BLS report were mostly encouraging. Office-using employment grew by a strong 93,000 in June. The post-recession pattern is that every office-using job created generates 173 sf of net new demand for office space. Based on the latest job growth trends, the U.S. office sector will observe a nearly 10% increase in demand for office space in the coming quarters. The other job sectors that heavily influence commercial real estate also showed overwhelmingly positive trends. The manufacturing, transportation and utilities sectors, which correlate well with U.S. industrial markets, added a combined 88,000 jobs, and the retail sector added 40,000. Also notable: after shrinking for five years, the Federal Government added 2,000 net new jobs in June. Lastly, it was encouraging to see that the number of people who work part-time for economic reasons continues to trend downwards.
Still, it’s also evident that the labor force is far from being fully healed. There are still 2 million more people currently collecting long-term unemployment benefits than before the recession. Labor force participation, though slowly improving (as it did again in June) is still far from normal levels: 62.8% currently vs. 66% before the recession.
Although the economy is revving up, we do not anticipate the Fed will change its course with regard to monetary policy. The core personal consumption expenditures index, the Fed’s preferred measure of inflation, was 1.4% in May, still well below the Fed’s target rate of 2%. Moreover, although wage inflation is edging higher, that too remains relatively weak, still slightly below 2%. Thus, the Fed will continue with its tapering program but likely will not raise short-term interest rates until late 2015. All in all, employment trends are strong. That encourages consumers to spend, which helps an economy maintain altitude.
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By: Kevin Thorpe
Chief Economist, Cassidy Turley - Washington, D.C.
Follow Cassidy Turley on Twitter: @CassidyTurleyRE
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