This Week’s Developments in the US Economy

Recipe for a Resilient Economy: Robust Hiring and Resolving Labor Disputes  

In our weekly Note, we occasionally pick a topic that shifts on us mid-week, and it is not always in our favor. However, this week delivered a pre-release surprise in the tentative resolution of the SAG-AFTRA strike (aka the “Actors’ Strike”), which reinforces one of the topics we focused on: the health of the labor market as a pillar of US economic resilience. Combined with the resolution of the UAW strike (aka the “Autoworkers’ Strike”), we view the recent jobs report as stronger in the context of the yet-to-be-measured employment gains from resolved labor disputes expected in next month’s report.

The initial read of October’s employment report underscored the continued strength of the US labor market, especially when placed in historical context. While the unemployment rate saw a slight uptick, the monthly net increase in job growth exceeded the net monthly rise in unemployment. Nonetheless, the current labor market outperforms historical benchmarks in a few key areas, highlighting a durable foundation for the US economy.

Nonfarm Payroll Sees Continued Growth
In October, nonfarm payrolls increased by 150,000 jobs—30,000 below the consensus estimate. The mismatch between the consensus and the actual figure could be attributed to the 33,000 jobs missing as a result of the Autoworkers’ Strike. Excluding those omitted jobs, the net change in nonfarm payrolls lags just behind the 166K average of the previous cycle, but it remains well above the monthly change of 88K needed to keep pace with the pre-pandemic annualized population growth of 0.7%. Consequently, nonfarm payrolls are still expanding, albeit at a slower pace. Notably, we continue to see hiring in previously difficult-to-hire categories, such as healthcare and social assistance, which added a combined 77,000 jobs.

The Labor Force Shrinks Slightly as More Older Workers Depart Early
Contraction in the labor force itself had repercussions on the labor force participation rate, which dipped from 62.8% to 62.7% in October, which remains below the post-GFC average of 63.4%. Older cohorts of workers continue to shrink, with the most substantial decrease occurring in the 45-54 and 55+ age cohorts, which saw declines from 82.6% to 82.1% and 38.8% to 38.6%, respectively. These age groups have experienced structural post-pandemic shifts, with the 45-54 age cohort maintaining levels above its historical average participation of 80%, while 55+ cohort lagging the recorded average levels of 40%. Meanwhile, the other age groups within the prime age labor force range of 25-54 remained largely unchanged in October, holding steady and well above their historical averages.

Unemployment Levels Remain Historically Low
The unemployment rate increased in October, from 3.8% to 3.9%. While the rate is at the highest level seen since January 2022, it remains historically low compared to the previous cycle’s average of 6.4%. The slight increase can be attributed to a combination of decelerating job growth, a rise in the number of unemployed individuals, and the overall decrease in the size of the labor force.

What is changing is that job seekers are likely to experience longer durations of unemployment. The increased unemployment rate implies that the number of unemployed people is growing at a faster rate than the number of people transitioning into employment. While the average number of weeks required to regain employment is lower than the previous two years, the most recent data highlights this increase in number of people needing 15-26 weeks and 27 or more weeks to find new employment, which have increased 21% and 15% year-to-date. An increase in the number of days it takes to regain employment indicates job switchers have less security, already evident in the declining wage growth for job switchers, which is coming into parity with average wage growth. We view this as a positive with regard to decreasing inflationary pressures, the Atlanta Fed Wage Growth tracker shows decelerating wage growth on a 3-month moving average. In September it reached 5.2%, down from the 6.7% high we observed a little over a year ago, but still well above the average of 2.7% during the previous cycle.

Credit Conditions Normalizing for Portions of Commercial Real Estate 

After observing tightening credit conditions affecting commercial real estate (“CRE”) almost universally, the latest Senior Loan Officer Opinion Survey (“SLOOS”) from the Federal Reserve highlights steady conditions from large banks while noting some additional tightening by mid- and small-sized banks. This hints at a potential stabilization in credit conditions, offering welcome stability to a sector grappling with prolonged uncertainty. In addition, the July SLOOS included a section gauging the outlook for the second half of 2023, with loan officers anticipating further tightening in all loan categories due to an uncertain economic outlook and expected deterioration of collateral values. Contrary to the expected trajectory, we saw a decrease in the net share of banks tightening credit standards for CRE loans in the Q3 SLOOS. However, it is important to note that it signifies a neutral stance rather than outright easing of lending standards (see accompanying visuals). 

The Twofold Impact of Tightening Lending Standards on CRE
Despite the potential stabilization of credit conditions, the implications of tightened lending standards have already taken hold. First, as highlighted in previous Weekly Notes, we anticipate a deceleration in new CRE supply, encompassing multifamily and other CRE sectors. The tightening of construction and land development lending standards has slowed the pace of development for new properties, and we anticipate that projects that are able to clear current hurdles are likely to deliver into less competitive supply conditions. 

Second, the tightening of standards by conventional lenders sets the stage for an evolving capital markets environment. As banks, particularly smaller ones, adopt a more conservative approach, alternative lenders find themselves with a growing pool of creditworthy borrowers. This shift in dynamics could reshape the landscape of CRE financing going forward, as alternative lenders step in to meet the demand left by retreating traditional lenders.

Neutral Stance Navigating Nuances Among Banks’ Standards  
While not directly related to our assessment of CRE lending conditions, it is important to note how evolving banking sector conditions may influence how we read and analyze Fed data. Delving deeper into the recently released October SLOOS, some nuances emerged when examining the breakdown between large and smaller-sized banks. Specifically, there has been a change in the definition and distinction between large and “other banks” reported by the Fed. In the October 2023 release, banks with total domestic assets of $100 billion or more as of June 30, 2023, are categorized as large banks. In comparison, the previous surveys categorized large banks as having domestic assets of $50 billion or more. The implication of this change will increase the pool under the other banks category which may impact the answers with regards to lending standards. The significance of the size distinction, however, lies in smaller or community banks holding an outsized proportion of CRE loans, constituting 28 percent of the banking industry’s CRE loans compared to only 15 percent of the industry's total loans (as of Q1 2023).