Executive Summary: U.S. employers added 156,000 jobs in December, which fell short of expectations. Wage growth jumped significantly—by 0.4% or 10 cents an hour—and is up 2.9% year-over-year, the highest level in seven years.
Fed Watch: We expect the Fed to increase interest rates up to three times in 2017. Other forecasters predict four increases, assuming a large stimulus package from Congress in Q2 2017.
The market has consistently over-predicted Fed moves since the 2008 recession, so it would be premature to price three or four increases into debt pricing expectations until post-inauguration policy becomes clearer. Further, predicting a rise in the 10-year Treasury rate in lockstep with any Fed move is inadvisable. While the Fed has strong control over short-term rates (LIBOR), the world bond market has greater control over the long-end of the curve (10-year Treasury) and will be influenced by more global and unpredictable factors.
Interest Rates: Interest rates were relatively unchanged by today’s announcement, but are up almost 60 basis points (bps) post-election. The 10-year Treasury is and will likely remain volatile for some time until policy changes become clearer. Treasury bill yields have averaged about 2.5% in the past few weeks, so expectations that we are on a direct road to 3% yields in 2017 are premature.
We are tracking transaction pricing very closely and will have a client conference call regarding this on January 12 at 2 p.m. EDT to discuss in more detail. The preliminary data indicate limited movement. More than two-thirds of transactions have shown no change in pricing post-election. For those that have re-traded, the change is approximately 3% or less on average.
Taxes & CRE: The potential negative changes to tax policy are getting enormous attention by the commercial real estate industry, and the major industry trade groups are working hard on mitigating them. Proposed or rumored changes to the 1031x (elimination), the carried interest tax (change to ordinary income treatment) and deductibility of interest expense (elimination of tax deduction) are causing significant concern. Other positive changes to tax policy for the commercial real estate industry—notably full expensing of capital spending in the year it is incurred rather than depreciating over time—are getting far less attention, but must be balanced and analyzed against any potential negative changes in order to reach a firm conclusion.
Job Growth Outlook: The three-month rolling average job growth fell to 165,000 in December—a drop of 11,000 from November. The economy added 2.2 million jobs (roughly 180,000 per month) in 2016, compared with 2.7 million in 2015 (roughly 225,000 per month). We haven’t changed our pre-election forecast of slower job growth in 2017 due to the skills mismatch between those looking for work and employers. Potential economic stimulus by the new administration most likely will not have a direct impact on job growth until 2018.
Wage Inflation Accelerates: Wage growth rebounded strongly in December after a November pause. Wages rose 2.9% year over year after a 0.4% increase in December. This is the largest increase in seven years. We expect wage growth to continue in 2017, giving the Fed additional reasons to raise rates.
The key issue for jobs in the U.S. is a labor shortage and a record number of job openings. In addition to pressuring the Fed to raise rates due to wage inflation, this will contribute to the continuing debate over immigration and automation.
Labor Force Participation: The labor force participation rate was unchanged in December and has barely moved since August 2013, hovering between 62.4% and 63.0%.
GDP Revised Up: Third-quarter GDP growth was revised upward to 3.5% annualized (from 3.2%). Fourth-quarter estimates remain below 3%, as the economy likely slowed during that time. 2017 forecasts have been revised upward, but the stock market is ahead of the economic forecasts.
Spencer G. Levy | Head of ResearchCBRE | Americas Research T 617 912 firstname.lastname@example.org | LinkedIn | Twitter