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  • Writer's pictureRealFacts Editorial Team

Economic Watch: Strong May Job Growth Likely Will Keep Fed on Hold

People waiting for a job interview

In a surprising turn, the U.S. labor market added 272,000 jobs in May, significantly surpassing the expected 190,000. Despite the revisions of March and April figures lowering job growth by a combined 15,000, May's robust performance underscores a resilient economy. This surge in employment is a key indicator that the Federal Reserve is likely to maintain its current interest rates until at least September, a decision that will have nuanced implications for the commercial real estate sector.

Job rate statistics

Broad-Based Job Gains and Their Impacts

May's job growth was broad-based, with significant contributions from sectors like health care, government, leisure & hospitality, and professional services. This diverse expansion suggests a solid foundation for continued economic resilience. However, the slight increase in the unemployment rate to 4.0% and a marginal decline in the labor force participation rate to 62.5% indicate a complex labor market landscape.

Professional Services: Bolstering Office Demand

Office-using jobs significantly increased, with professional & business services adding 33,000 positions and financial activities contributing another 10,000. This job growth supports leasing demand for office spaces. However, the sector still faces headwinds from an uncertain business environment. Companies are cautious about long-term commitments, but the steady job growth offers a cushion against drastic downturns in office space demand.

Retail and Industrial Sectors: Navigating Challenges and Opportunities

Retail experienced a resurgence with 37,200 jobs added in May. Traditional retail gained 12,600 jobs, while food services & drinking places saw an increase of 24,600 jobs. Despite high inflation and the depletion of excess savings posing challenges, the fundamentals of the retail sector remain strong due to limited new supply. This stability is expected to sustain retail space demand.

In the industrial sector, manufacturing added 8,000 jobs, and warehousing & storage gained 700. The continued strength in e-commerce and a relatively healthy consumer market will drive demand for industrial spaces, particularly warehouses and distribution centers.

Construction: Resilient Amidst High Interest Rates

The construction sector's addition of 21,000 jobs highlights its resilience despite high interest rates. Fiscal policies and a persistent single-family home shortage will continue to support construction activity. This growth ensures ongoing demand for construction-related real estate, from residential projects to infrastructure developments.

Multifamily: Benefiting from High Mortgage Costs

The multifamily sector is poised to benefit from continued job growth and high mortgage costs, making renting a more attractive option. This dynamic supports household formation and fuels rental demand, ensuring robust performance for multifamily properties.

Interest Rates and Economic Outlook

The strong job and wage growth observed in May suggests that the Federal Reserve will maintain its current interest rates until at least September. This cautious stance is driven by the need to manage inflation while supporting economic growth. Despite this, we expect the economy to slow further, with inflation trending downward throughout the year. The anticipated soft landing implies avoiding a recession, although risks remain as interest rates stay higher for longer.

Looking ahead, we expect the combination of slowing economic growth, lower inflation, and the eventual easing of Fed monetary policy, to result in the 10-year Treasury yield ending the year at 4.1%. This scenario should support increased debt and equity investment activity and improve asset values starting in Q4. The resilient economy and strong labor market will continue to be tailwinds for leasing activity across various real estate sectors.

May's robust job growth underscores a resilient labor market that will influence commercial real estate dynamics and interest rate policies. While challenges remain, the diverse sectoral gains and steady economic performance provide a hopeful outlook for the coming months. Investors and stakeholders in the real estate market can anticipate a period of adjustment followed by potential growth, driven by a stable job market and strategic fiscal policies.


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