Unemployment, Inflation, and Grabbing a Bite to Eat

Finally some good (enough) news!

Last week the ADP jobs report hinted at a cooling off the labor market with a projected 152,000 jobs added. Last Friday the Bureau of Labor Statistics (BLS) reported that an increase of 272,000 jobs while revising March and April numbers down in total by 15,000 jobs (to 310,000 and 165,000 respectively). Unemployment ticked up to 4%, one of the two targets that the fed was hoping to reach.

Relating to construction, 21,000 jobs were added in May after a revised total showed no growth in April.  Construction unemployment ticked up to 3.9% versus the 3.7% rate seen a year ago.

Most notably though was the continued decrease in job openings which dropped by 8k month over month (m-m) and by 25k year over year (y-y). Hires decreased, also both m-m and y-y, but this does signal any alarms as contractor backlogs stayed flat despite being down by a couple of weeks when compared to a year ago.

How can jobs increase so significantly with unemployment also increasing?

Great question! The dual increase is largely due to the impact that higher immigration is having on the job market. As unemployment has risen from a low last year of 3.4% while monthly hiring gains.  

Is this helping to curb inflation?

A strong job market that is showing signs of some softening will help to slow wage growth, which gets passed along to the end consumers.

What about inflation these days?

The Consumer Price Index (CPI-U) released this past week was flat m-m after four months of growth of 0.3% of more, bringing the total down to 3.3% y-y, still above the other one of the fed’s targets, annual inflation of 2%.

Main factors this month (with % change y-y):

•           Food +2.1% (largely food away from home)
•           Energy +3.7% (largely electricity)
•           Commodities -1.7% (declines in new and used vehicles)
•           Shelter +5.4% (rent and Owner’s Equivalent Rent of Residences)
•           Medical Care +3.1% (largely hospital services)
•           Transportation +10.5% (largely auto insurance)

No real surprises here as the figures were in line with April’s figures, but let’s look at food for a second, specifically food away from home.

Food away from home is up 4% y-y. Despite trending higher than the average inflation rate the Wall Street Journal reported on Tuesday “Now, with Americans dining out more than ever, the restaurant business is emerging as the hottest corner of retail real estate.”

Why are people spending more on food out when it is more expensive than eating in?

Demographics and cultural shifts. Several factors play into this surge. Unemployment is low and wage growth, while cooling, remains elevated. People are waiting longer to marry and have kids, which leads to more dining in than out. Single people are also likely to eat out more than married families.

What does this mean for construction?

More than 19% of retail leases last year were restaurants, the highest proportion since 2007. Spending on dining/drinking construction has risen 23% y-y. This trend does not seem to be slowing until wage growth right sizes and falls back in line at or below inflation.

With numbers starting to behave more like the Fed wants, optimism is growing that a rate cut is more likely to happen by the end of the year. This will help developers and owners get the funding to move forward on delayed or on-hold projects in this wait-and-see market.