November 08, 2019 |
Does the Big Drop-Off in Retail Construction and Job Openings Portend Trouble Ahead?
The most notable economic release of the past week was the Institute for Supply Management survey of non-manufacturing businesses, which reported an index of 54.7 and indicated that the service sector of the economy remains in modest expansion mode. (Anything above 50 is considered good.)
While the survey showed a rebound from September, plenty of concerns still remain, highlighted by quotes like the one above.
Construction executives are hardly alone in their worry. The same uncertainty is impacting business expansion plans generally, based on other recent reports.
Clues to the unease can be found in construction spending data for September issued recently by the Bureau of Economic Analysis.
While the bureau’s data lags a bit in terms of timeliness (Come on, it’s November already!), the construction spending update should be interesting to commercial real estate professionals. Additionally those seeking to look behind the curtain of flagging business investment also may take note.
The details are a bit shocking: Spending on retail construction has fallen to $20 billion, or 36%, year over year. This has contributed to a 0.1% drag in nominal gross domestic product growth and a 0.7% drag in nonresidential investment. Without this decline in retail construction, nominal nonresidential investment would be at a 3% rate instead of 2%, and the trend would look much better, more like a bottoming than a straight line down.
The decline presents an interesting dichotomy: Consumer spending is currently propping up the economy, but retail construction activity has fallen off a cliff. Retail sales are hitting new highs and the growth rate has reaccelerated, but retail employment has fallen by 122,000 since its peak in January 2017 and now makes up only 10% of total U.S. employment, the smallest share since the 1960s.
Is this a story about the rise of Amazon and e-commerce? Is it a story about the overbuilding of retail in the previous economic cycle? Or is it a story about the changing nature of retail in general, toward more experiential and unique properties? It seems like the answer is yes to all the above.
Retail isn’t the only sector where the employment picture is worsening. While jobless claims are still exceptionally low, the surge in new hiring seen earlier in the economic cycle has dissipated. The number of open jobs, released at a two-month lag, has fallen to 7 million as of September. This number is more than 400,000 fewer positions than were open at the beginning of the year.
While still at a very high level, on most occasions when the number of open jobs begins to drop, it signals recession, speaking again to the arresting effects of uncertainty on business expansion. Retail again rears its ugly head here, responsible for about half of the drop.
This presents a bit of an eye-of-the-beholder question. Is this a secular trend confined to retail, or is it a canary in a coal mine for the economy? The answer, as it often does in economics, lies somewhere between the two. For now, the Federal Reserve appears patient enough to wait out the answer.
Markets latched on to Fed Chairman Jerome Powell’s comment that the Federal Open Market Committee would need to see a “significant move up in inflation” to raise rates. Both the New York Fed President John Williams and Chicago Fed President Charles Evans indicated a similar preference for patience in speeches in the past week. This was the instinctual read from the prior week’s Fed meeting, now seemingly confirmed.
A week without many economic data releases means the trade winds blow even harder, or at least it feels that way. As President Trump and Chinese President Xi Jin Ping search for a meeting place to discuss rolling back tariffs as part of a “phase one” trade deal, markets fluctuated throughout the week on even the most minor of updates. Unfortunately, nothing will be certain until we see pen strokes on paper.
The Week Ahead
The week will surely contain more trade rumors, headlines and tweets. We get essential data on the consumer in Friday’s retail sales data for October, which should provide clarity on how China tariffs are being managed against strong wage growth. Small businesses are set to report their confidence in the economy in the National Federation of Independent Business report due out on Tuesday.
The Consumer Price Index for October releases Wednesday. This will be particularly interesting due to a bifurcation we’ve seen recently. While business surveys all point to falling prices, most reliable “core of core” inflation measures are running hot.
Meanwhile, inflation expectations, as measured by Treasury Inflation-Protected Securities, ripped higher, due to both the inflation-dove quotes by the two Fed bank presidents mentioned above and the Organization of the Petroleum Exporting Countries contemplating production cuts in oil.
More modest are the 5-year, 5-year forward inflation expectation rate break-evens, which tend to wash out short-term noise.Finally, Powell is scheduled to speak to Congress Wednesday and Thursday, hoping to clarify the recent shift in policy guidance.