Understanding Mixed Signals: Analyzing the Economics of Labor and Spending

In this second article of a four-part series, Connect CRE reached out to economic experts for their take on the labor market and consumer spending. The first article in the series, “Economic Recap and Federal Reserve Actions,” is available to read here.

The labor market and consumer spending are two factors that drive commercial real estate’s success or failure. The former is because it impacts housing and, by extension, retail and other sectors. Consumer spending is also a bellwether for decision-making on the side of retail space.

Today’s challenge is that labor and consumer spending signals lack clarity or consistency to assist with strategic decision-making for investors. Connect CRE contacted experts in the economic realm to obtain a better understanding of the data supporting labor and consumer spending.

Labor’s Mixed Signals

The Bureau of Labor Statistics (BLS) measures employment in two ways. The Household Survey Data (also called the Current Population Survey) determines unemployment, while the Establishment Survey Data outlines jobs added. Since the new year, the Establishment Survey has continued adding new jobs (with preliminary estimates of 206,000 jobs added in June). Meanwhile, unemployment inched upward, coming in in June 2024 at 4.1% on an annualized basis.

According to Stephen Buschbom and Ray Perryman, the differences between the two surveys’ data are one reason for the current confusion.

“The Establishment Survey is showing growth, while the Household Survey is not,” said Perryman, president and CEO of The Perryman Group.

Then, there is the “noise” coming from both surveys. Perryman explained that part-time work is often counted in the jobs report, skewing the metrics upward. Additionally, “people with two jobs are counted twice in the BLS payroll survey but only once in the household survey,” said Buschbom, Trepp Inc.’s Research Director.

Added to the above is an adjustment known as birth-death, which counts jobs created by new businesses and jobs lost by companies that close down.

“That birth-death adjustment can be problematic when the economy is at a turning point, and it’s known to overestimate the number of jobs created,” Buschbom observed. “The number of businesses closing will be higher than the recent historical average and result in greater job losses than what is predicted by the birth-death model.”

Finally, the BLS releases preliminary numbers for the previous month and revises them as the data are scrubbed. The problem is that the preliminary numbers garner the headlines, while the revised numbers tend to be an afterthought.

For example, the BLS reported that the U.S. economy added 175,000 jobs in April 2024 and 272,000 in May.

But these are preliminary numbers, subject to later revisions. The revised numbers in April in May ended up not being so robust, with downward revisions totaling 111,000 revisions for the two months in question. This brought the three-month payroll gains average to 177,000, the slowest pace of job gains since January 2021.

Yet those downward revisions shouldn’t spark concerns. “While some of the recent data may be interpreted as signs of weakness, it’s important to put the data into perspective, as we’re coming out of a super recovery,” commented Altus Group’s Director of Research Omar Eltorai. “Many of the labor market indicators look bad compared to the last few years, but the negativity is much less pronounced, and most still look quite healthy when compared to longer historical norms.”

BGO Chief Economist and U.S. Research Head Ryan Severino agreed with Eltorai’s assessment, adding that the labor market remains tight, even with fewer jobs added. Severino explained that a demographics-based labor shortage is involved, with companies not laying off workers all that rapidly.

“Even though organizations have become more circumspect about hiring, they generally aren’t letting workers go because of the difficulty in attracting and retaining talent,” Severino said.

Finally, the labor market itself is unbalanced in its hiring practices. Jay Denton, chief economist at Radix, explained that less than two-thirds of the new jobs are focused on healthcare, social assistance, government, leisure and hospitality. Meanwhile, the finance, technology, professional services, manufacturing and research sectors are experiencing the addition of fewer jobs.

Slowing Consumer Spending, But . . .

There’s a direct correlation between jobs and spending. Specifically, people with jobs are more likely to spend money on goods and services, which is where the Bureau of Economic Analysis comes into play. Data for consumer spending, defined by the BEA as “the goods and services purchased by, or on behalf of, people living in the United States,” is released quarterly (through the GDP) and monthly (through the personal income and outlays release).

The nation’s real GDP grew at an annual rate of 1.4% during Q1 2024. This number generated the usual headline “pearl-clutching,” with other experts calling for calm. More recent data from the May 2024 Personal Income and Outlays reported an increase in consumer spending of $47.8 billion, a 0.3% month-over-month growth.

This isn’t near the wild spending days of 2022 and early 2023. However, experts queried by Connect CRE pointed out that the extreme pace of spending was unsustainable, especially in light of slowing wage growth and a labor market cool-down.

For one thing, just about everyone used their surplus COVID cash from the government and struggle to meet daily needs. “Additionally, prices are going up for issues like insurance, home maintenance and property taxes,” Perryman said, which curtails spending.

Eltorai pointed out that while positive wage growth has helped drive spending, “more consumers are beginning to stretch beyond their means.” Additionally, consumer credit is more expensive (not to mention credit card default rates are rising), while the personal savings rate has dropped below the COVID-era peak.

On the other hand, “services spending remains robust, and spending on goods has held up well,” Severino said. “The services sector of the economy is clearly outperforming the manufacturing sector, and consumer spending patterns are playing a role in that.”

Jonathan O’Kane, vice president of Chandan Economics, agreed with the shift in spending from goods to services. “Whether it is due to a preferential shift toward more experiential purchases or because Americans spend more time at home each day than before the pandemic, consumer patterns have not yet settled into a new stable pattern,” O’Kane said. “Sensitivities and aggravations around high prices are part of the story, but so are structural shifts in how we spend.”

Making Sense of the Metrics

The takeaway from the above is that hiring and spending are slowing down due, in part, to the Federal Reserve’s efforts to tame inflation through the higher-for-longer Effective Federal Funds Rate. Additionally, the rapid pace of job growth and spending couldn’t go on indefinitely.

Still, consumer confidence in the economy has stalled in recent weeks. This could impact their willingness to spend, which makes up a large chunk of economic growth.

“I think we’ll continue to see consumers feel negative about the economy, given the rising prices they’re faced with every day,” Perryman said. “The culprits are a combination of inflation, with a dose of inflation fatigue and absorption of the stimulus largess.”