Market Insights July 10, 2017: Faster GDP Growth vs. Slowing Job Growth

by | 10 July 2017

  • Recent economic figures point to stronger growth this spring than in this past winter.
  • Economic growth for all of 2017 should outpace that in 2016. However, job growth continues to slow as we near full employment, notwithstanding the strong June jobs report.
  • Below-target inflation and wage growth will likely limit Fed hikes this year and possibly next year as well.
  • Overall, the key property markets drivers are still positive, but we should expect future gains in market fundamentals to moderate.

As we begin the second half of the year and await the preliminary GDP estimate for the second quarter (to be released on July 28), economists generally believe that growth has accelerated this spring after (yet) another slow winter. Actually, first quarter growth wasn’t as slow as first believed, as the government again upgraded its GDP estimate to 1.4%, fully double its initial figure of 0.7%.

Still, the most recent data has been below expectations: retail sales, consumer confidence, housing starts, durable goods orders and inflation all dropped in the latest reports. However, both new and existing home sales rose in May — the rare exceptions to the downward trends. Little wonder then that the Q2 2017 forecasts from the Atlanta Fed’s GDPNow model have been dropping. The GDPNow model still calls for a relatively robust 2.7% annualized growth during the second quarter, but the figure was 4% as recently as a month ago. Other sources suggest rates between 2.5% and 3%.

Looking further out, the average forecast from Consensus Economics calls for 2.2% growth for the year as a whole. This is better than the 1.6% growth in 2016 but still modest by historical standards, which has been the hallmark of this economic cycle. Business investment is now the strongest economic driver of GDP and is expected to grow 4.4% this year versus a decline of 0.5% last year. Meanwhile, the much larger consumer sector is anticipated to slow slightly, from 2.7% growth in 2016 down to 2.5% this year. With dwindling expectations of a stimulus package coming out of Washington this year, the consensus economic forecast is now about the same as it was prior to the November election.

Regardless, U.S. job growth appears to have peaked and is slowing as we near full employment, notwithstanding the strong June jobs report. This trend carries significant implications for property markets as jobs are the single greatest driver of space absorption. Firms tend to lease more space when they are adding headcount, although to a lesser degree today than in prior cycles as firms are being more efficient in space usage and more employees are working remotely.

Sources: Bureau of Labor Statistics, Oxford Economics and Colliers International

Job growth has been among the strongest economic indicators in this expansion, helping to fill space vacated during the recession and new space constructed since. But as shown in the chart above, quarterly job growth peaked in mid-2014, and the four-quarter moving average has now declined for eight of the past nine quarters through Q2 2017. Accordingly, net absorption of both office and industrial space has been slowing in recent quarters.

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Andrew J. Nelson is Chief Economist for
 Colliers International in the United States. Based in San Francisco, he covers a mix of general economic topics as well as related issues that bear on the performance of property markets.

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