Today’s October jobs report underscores the effect of several unique factors on recent employment trends, showing a moderate rise in payrolls while hinting at possible shifts in the labor market’s trajectory.
Key Findings
Payroll Growth Slows
Nonfarm payrolls saw only a 12,000 increase in October, down significantly from September’s revised figure of 223,000. This slowdown brings the three-month payroll trend closer to a breakeven level around 113,000 jobs per month, the pace needed to sustain current unemployment rates around 4.1%. Adjusted for population projections from the Census, this threshold has been higher when factoring in more robust immigration estimates like those from the Congressional Budget Office (CBO). Without stronger payroll growth, we could see an uptick in unemployment in the coming months as employment creation lags population growth.
Unemployment Rate and Labor Force Participation
The unemployment rate remained stable at 4.1% in October, though technically it rose slightly, from 4.051% to 4.145%. Notably, household employment contracted from a gain of 430,000 in September to a decrease of 368,000, and the labor force participation rate dropped 0.1 percentage points to 62.6%.
Wages Remain Elevated
Average hourly earnings increased by 0.4% month-over-month, slightly higher than September’s 0.3% increase. However, on an annual basis, wage growth slowed from 4.4% to 3.3%, indicating a cooling yet still elevated wage environment. Despite this decline, annual wage growth remains above levels consistent with the Fed’s 2% inflation target, driven in part by skill and sectoral demand mismatches.
Additional Insights
Unemployment Flow Rates
October’s data on unemployment rates and job-finding rates points to a slight decline in the ease with which job seekers are finding positions, despite the lower numbers of newly unemployed. When factoring in both job-exit and job-finding rates, an alternative, “flow-consistent” unemployment rate has been trending slightly higher, signaling potential shifts toward a 4.2% stabilization in the near term.
Sector and Composition Effects on Wages
Even after adjusting for sector-specific and skill-based composition effects, annual wage growth remains slightly above levels typically compatible with low inflation. This resilience suggests that the Fed’s target of tempering inflation will require cautious adjustments in wage growth over the next quarters.
Implications for Interest Rates
With payroll growth hovering near breakeven levels and the labor market showing signs of softening, the Federal Reserve is likely to proceed with a more cautious approach to interest rates. Inflation has cooled somewhat but remains slightly above the Fed’s 2% target. Despite this, wage growth has been resilient, though it’s beginning to show signs of cooling as well.
Given these conditions, the Fed may continue with modest rate cuts—potentially 25 basis points in November and December—as a way to support employment without sparking excessive inflation. However, any rate decisions will be data-dependent, and the Fed will likely evaluate wage trends, unemployment figures, and economic growth as it sets its course for early 2025. This tempered rate-cutting environment may keep the cost of borrowing slightly elevated but manageable, which could bode well for sectors sensitive to rate changes, like real estate.
Potential Effects on Commercial Real Estate
Financing Costs and Capital Flow
For CRE, interest rate stability or slight reductions could provide welcome relief to developers and investors who rely on financing to fund projects. Over the past year, rising rates have pressured acquisition costs and project feasibility. If rates plateau or drop gradually, financing costs will ease slightly, which may stimulate increased capital flow into CRE investments. This is particularly beneficial for investors focused on multifamily and industrial assets, where demand has remained strong.
Property Valuations
A slowdown in payroll growth and stable interest rates may create an environment where property valuations can stabilize. While aggressive rate cuts could prompt concerns about overheating or excessive inflation, moderate reductions can provide balance. Stabilized valuations are critical for the health of the CRE sector, as they directly impact loan-to-value ratios, refinancing prospects, and investor returns. This stability can help CRE professionals better plan acquisition and redevelopment strategies, particularly in volatile submarkets.
Occupancy and Demand
Employment stability also influences demand for commercial properties. The modest wage growth and steady job market signal potential resilience in demand for office, retail, and industrial space, though more so in sectors aligned with population growth. Any additional cooling in employment growth, however, could slow demand, particularly in office spaces where occupancy rates are closely tied to the labor market’s performance.
Investor Sentiment and Sectoral Shifts
The report also raises questions about potential shifts in investor sentiment. Many CRE investors may view a stable or slightly dovish Fed stance as a favorable environment to seek opportunities in growth areas like multifamily or data centers, while potentially reevaluating commitments to office or retail assets. With labor market trends uncertain, CRE investors might also look to diversify geographically, targeting markets with stronger employment fundamentals or high population growth.
Looking Ahead
The October jobs report hints at a decelerating but resilient labor market, and the Fed’s likely response could foster a more stable rate environment that supports financing and growth. This period represents an opportunity to assess market fundamentals, focusing on regions and property types that align with long-term demographic trends and employment resilience.
Overall, while some caution is warranted due to broader economic uncertainties, a balanced interest rate environment may provide CRE investors with the predictability they need to navigate the months ahead effectively.
