\n<\/p>\n
Unemployment<\/strong><\/a> was supposed to be much higher by now<\/strong>. With the Federal Reserve increasing its rate hikes over 2022 and into 2023, the labor market should have cracked already. But it hasn\u2019t, and many mainstream investors have struggled to determine why. With a higher cost of capital, businesses should be more selective with who they\u2019re hiring and keeping, but instead, we\u2019re seeing the labor market have much more power<\/strong> than they\u2019ve had in the past. So, did we successfully dodge an employment crisis<\/strong>, or is a rude awakening coming our way?<\/p>\n Joe Brusuelas<\/strong>, principal and chief economist for RSM US LLP, knows that we\u2019re thinking about unemployment all wrong. As a leading economist with over twenty years of experience, Joe has seen multiple recessions, crashes, and unemployment crises<\/strong>. He knows exactly what it would take to make the labor market snap and push the country into a recession<\/strong>. Joe breaks down precisely what the <\/strong>Federal Reserve<\/strong><\/a> has been planning<\/strong>, when its interest rate hikes will finally take effect, and what the future of the labor market looks like.<\/p>\n He also touches on how we may be entering an entirely different era of the economy<\/strong>, one with tight employment, higher <\/strong>interest rates<\/strong><\/a>, and higher inflation than we\u2019ve been used to. This directly affects almost every consumer in America<\/strong>, and investors can get ahead of the economy by knowing when this unemployment scale will finally balance. So don\u2019t sit on the sidelines and be surprised when these economic forces take shape. Tune in!<\/p>\n Dave: Joe: Dave: Joe: Dave: Joe: Dave: Joe: Dave: Joe: Dave: Joe: Dave: Joe: Dave: Joe: Dave: Joe: Dave: Joe: Dave: Joe: Dave: Joe: Dave: Joe: Dave: Joe: Dave: Joe: Dave: Joe: Dave: Joe: Dave: Joe: Dave: Joe: Dave: Joe: Dave: Joe: Dave: \u00a0<\/p>\n<\/div>\n Interested in learning more about today\u2019s sponsors or becoming a BiggerPockets partner yourself? Email <\/em>[email\u00a0protected]<\/span><\/em><\/a>.<\/em><\/p>\n Note By BiggerPockets:<\/b> These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.<\/p>\n
Hey everyone. Welcome to On The Market. I\u2019m your host, Dave Meyer. And today, I\u2019m going to be joined by an incredible guest, Joe Brusuelas, who is the principal and chief economist for RSM US. And he is going to be talking about a topic that isn\u2019t immediately obviously relevant to real estate investors, but it\u2019s super important and that is the labor market.
And if you\u2019ve been following the news, you\u2019ve probably seen that despite tech layoffs that have really made a lot of splashy headlines in January, which is the last data we have for the job market, as of this recording, there was an unexpectedly large number of jobs added over 500,000. And this obviously impacts every one of us because we, most of us want jobs and have jobs and whether or not there are layoffs and how the economy is growing is super important.
But the labor market is also really fundamental to what the Federal Reserve is doing right now. And obviously as real estate investors, we care a lot about what is going on with the Fed and what they\u2019re doing with interest rates.
And just before we have Joe on, I just want to re-explain something we\u2019ve talked about a few times on the show, but I just want to make clear, is that in the Federal Reserve, their mandate from Congress is twofold. They have two jobs. The first on one hand is to, is they call it price stability, which is basically fight inflation, right? Don\u2019t let inflation get out of control. You want stable prices. Their target right now is 2% growth per year. That\u2019s what the Federal Reserve targets.
On the other hand, they also want to ensure maximum employment. They want as many people working as possible. And these are their two jobs, and sometimes they work really well together. For most since the Great Recession until the pandemic, they were doing really good. We had relatively low unemployment, we had low inflation. That was great for the Federal Reserve. It made their job relatively easy.
Now, over the last couple of years, it\u2019s gotten a lot harder because we have two things going on. We have inflation going up so rapidly, that many economists, and we\u2019ll hear Joe\u2019s opinion about this in just a minute. Many economists feel that we need less employment to control inflation. And I\u2019m not saying that\u2019s what I want. I don\u2019t want anyone to lose their job, but a lot of economists believe that the key to fighting inflation is to increase the unemployment rate.
The thought here is that, if you increase the unemployment rate, fewer people have less spending power, they spend less money. That puts less, that puts downward pressure on demand and prices basically. So a lot of people think that, and a lot of the Fed\u2019s intention with raising interest rates is to create what they call, quote, unquote, they call it, they have this word for it like, \u201cslack in the labor market\u201d quote, unquote, basically means more people losing their jobs.
So the Fed is basically hoping, it\u2019s not what they want, but they\u2019re basically saying that they are so worried that about inflation being bad, that they\u2019re willing to sacrifice their other mandate. They\u2019re willing to increase unemployment in that effort.
The problem is that nearly a year after their first interest rate hike, it\u2019s not working. The unemployment rate is extremely low. And frankly, I don\u2019t fully understand why. Which is why we invited Joe onto the show.
Joe has been an economist for 20 years. He\u2019s got a lot of really interesting opinions about what\u2019s going on in the labor market, and obviously Joe doesn\u2019t know for sure, but he\u2019s an expert on this topic and studies it a lot. And what he talks about will have a really big implication on what happens with interest rates and the housing market, obviously follow those interest rates decisions.
So I found this super interesting and gave me a lot to think about. I hope you enjoy it. So we\u2019re going to take a quick break, but then bring on Joe Brusuelas, the chief economist and principal for RSM US.
Joe Brusuelas, welcome to On The Market. Thanks for being here.<\/p>\n
No problem. Thanks for having me.<\/p>\n
So we\u2019re excited to have you on because we can\u2019t make sense of the labor market. So we\u2019re hoping you can help us understand what is going on. So can you give us a high level summary of how you see the labor market right now?<\/p>\n
Sure. A couple of things. The first is between 1945 and 2015, the labor market grew about 1% per annum. Given the shocks we went through in the great financial crisis, all of the things that followed, plus the shocks in the pandemic, the labor force is now barely growing.
We\u2019re talking one to two tenths of a percent per year. We\u2019re simply not producing enough native born replacement workers. And so we\u2019ve reached a situation where the labor market is going to remain historically tight for the foreseeable future. Let me put that in a context for you.
So we only need to produce about 65,000 new jobs a month to meet demand. That\u2019s very, very low. Right now, I think even notwithstanding the, \u201c517,000 jobs\u201d quote, unquote, that were created in January, the underlying rate of job creation is about 200,000 a month. So we just really have a very tight labor market.
Now, for many of your listeners, they\u2019re probably thinking, \u201cWhat\u2019s this guy talking about? All I read are how all these people are getting laid off. How intentions of hiring or slowing.\u201d Well, when you take a look at the underlying condition of the labor market, the median duration of unemployment\u2019s eight weeks.
So if I see 250,000 or so, people have been laid off in tech, why aren\u2019t they showing up? Well, not only are we not producing enough people, the people we are producing don\u2019t have the requisite skill sets that are necessary to meet where the demand is.
So those people who\u2019ve lost their jobs in tech, they have two choices. They can trade down, take a little less money and stay in tech, or they can go work in the other portions of the real economy where those skillsets are incredibly in demand and they\u2019re going to find very good employment at very good wages, triple to quadruple what the average American probably makes. So that\u2019s how you sort of square the circle. That labor market is tight. It\u2019s going to remain tight.
Here\u2019s the important thing. Wages are not going to increase at one and a half to 2% per year. We grew accustomed to between 2000 and 2020, they\u2019re probably going to be in that three to 4% range. And that\u2019s good for workers, but that\u2019ll be a challenge for businesses who are now adjusting to this historically tight labor market.<\/p>\n
And so it seems like this problem has become more acute recently, when if the source of the issues you say is sort of a lack of native born Americans. Why is it sort of all coming to a head right now?<\/p>\n
Well, in 2017, we really began to tighten immigration policy on top of the tightening that occurred really since 9\/11. And so the typical solution in my lifetime, when labor\u2019s gotten tight is we go ahead and we begin importing workers, through either the H-1B visa or we increase legal immigration, or we just basically de facto legalize the illegal workers.
So when you tighten up on all those things you get in the situation that we\u2019re in. That\u2019s why over the last several years, labor market has become somewhat tight.<\/p>\n
So when we look at the unemployment rate in the US, I often get a lot of questions about this. I\u2019m hoping you can clear it up for us.
How is it calculated and does it factor for people leaving the labor market and people having two jobs or how, can you just explain to us how it works?<\/p>\n
So the monthly employment report is two separate surveys. The establishment and the household. The unemployment rate is derived from the household survey. It does account for people who exit the market, who exit the market permanently. And it attempts to see who is out of the market but looking for work. And then it does population adjust the number. So we get a pretty good sense of who\u2019s working and who\u2019s not. Now, is it perfect? It is not. But it\u2019s the best we have for now.
I think the important thing to understand is as wages have increased over the past three years following the shocks of the pandemic, we\u2019ve drawn people back in to the point where we\u2019ve got more people working than we ever have just on a nominal basis, even if the employment population ratio remains basically 60%.
So we are at a situation where the people who are now coming back to the labor market, their skillsets of atrophy, their professional networks are almost nonexistent, and they often need vast and deep retraining to make sense. And so this is adding costs onto the firms who now are really having a difficult time finding qualified workers. You can find workers, but can you find qualified workers that you don\u2019t have to train or retrain at an increased cost to your operation?<\/p>\n
Got it. Thank you. So most people assume, I\u2019m one of these people, that as interest rates have risen, that we would see larger percentage of firms laying off workers and that we would start to see the unemployment rate tick up, but we\u2019re seeing it move in the other direction. Can you help us make sense of that?<\/p>\n
Okay. Well, one is again, we just, it\u2019s what I outlined earlier. The population or the increase in the population of the labor force just isn\u2019t growing the way it did before, and that\u2019s created an imbalance. Okay?
Second, economists like myself do a terrible job at explaining the long invariable lags on the real economy from interest rate hikes. Now, historically it would take one to two years. Now, it\u2019s starting to show up in dribs and drabs, we can see it.<\/p>\n
And is that a year, sorry to cut you off, but is that a year to 24 months from the first hike? Because we\u2019re not even at a year for the first hike.<\/p>\n
Yeah. From the first hike in each successive hikes.<\/p>\n
So this could be years in the future.<\/p>\n
Yeah. We had six supersize hikes in the middle of last year. They\u2019re just barely beginning to show up. And second, we\u2019ve had some labor hoarding, especially in tech and especially in real estate construction. And it makes sense in tech, it\u2019s because we don\u2019t have people with those scientific math and engineering skills, right?
In labor or in the construction industry, it\u2019s because we cut off the immigration valve. So it\u2019s very difficult to find anybody to work. I built a home in Austin, Texas last year, early over the past two years. It took a long time to do that-<\/p>\n
That must have been a challenge.<\/p>\n
It was very difficult to find people to do the work, much less the supply chain issues where I had to put all kinds of things that I wouldn\u2019t normally put in the house because that\u2019s what was available.
And that added a secondary layer of cost once things begun to get available, but those are first world problems. That\u2019s not really something we got to concern ourselves with in the economy. So the combination of labor hoarding and immigration policy has created a situation of constraints in the overall economy.<\/p>\n
Could you just explain to everyone what labor hoarding means?<\/p>\n
Sure. What it means is that detect economy and the life sciences economy runs on a separate and distinct logic compared to the one that you live in. They are so flush with cash that when they find employees, they\u2019d rather keep them in order to meet expectations, expected increases in demand, even if that means they don\u2019t have enough to do with them.<\/p>\n
Wow.<\/p>\n
So that\u2019s why in 2022, you saw tech in the really last six to eight months of the year, released some of their workers back into the workforce. It was about a quarter of a million, a little bit less, but those people aren\u2019t showing up on the unemployment roles because hey, if you can hire them, you probably should because they can do some incredible things that your workforce probably can\u2019t.<\/p>\n
That\u2019s super interesting. So the cost of eventually replacing these people is higher than holding onto them through a recession.<\/p>\n
You just nailed it. The cost of letting them go is so expensive. You\u2019re better off keeping them, and we\u2019re beginning to hear that more and more inside the real economy, outside the supercharged areas of life sciences tech, obviously we see what\u2019s going on in artificial intelligence. And so right now it\u2019s very difficult to let somebody go. You don\u2019t want to because it\u2019s going to cost more to replace them.<\/p>\n
That\u2019s fascinating. But it sort of makes sense given this sort of challenge that people have had hiring over the last few years. There\u2019s definitely some, I\u2019m sure, some reticence to let people go because they\u2019ve seen just how difficult it can be to rehire.<\/p>\n
The last time we saw this was at the end of the 1990s during the dot-com era. I remember going to the grocery store and the unemployment rate was in the mid-threes, and it was difficult to hire people.
And I remember the person who back then who would\u2019ve bagged your groceries, was basically been out of workforce for a good 10 to 15 years and looked at me like, \u201cAm I supposed to be doing this?\u201d And I\u2019m like, \u201cWell, yeah, this is I think what you\u2019d be doing.\u201d And they didn\u2019t know how, right?
They were mixing up things, they were putting the eggs on top, that sort of thing. It\u2019s been a long time since we\u2019ve been in a situation where labor\u2019s just this tight. And it\u2019s natural that A, you\u2019re asking these questions and B, the public is going a little bit restless because the explanations we\u2019re providing don\u2019t match up with their historical experience, and we just haven\u2019t seen this in over a generation.<\/p>\n
So given that you\u2019re saying there\u2019s this lag of 12 to 24 months from each successive rate hike, do you expect unemployment to go up over the course of the year?<\/p>\n
Well, historically it was. I think it\u2019s a bit sooner for these reasons. One is transparency out of the central bank. We know what they\u2019re doing in almost real time. B, large scale asset purchases are what journalists call quantitative easing. The use of the balance sheet really impacts the real economy in very different ways because the Fed didn\u2019t do that part of the great financial crisis.
And then three, the structural changes in the market, mean financial markets are much more important, vis-a-vis the banks. So we get a much shorter time span. So it is going to start to show up. Okay, where will it show up? Here we go. Here\u2019s the thing you can take with you, Dave, and hang your hat on.
In the housing market, there are currently through the end of January, 1.7 million homes under construction, and that\u2019s just about what we need to, because we got a big shortage in overall, the overall stock of housing. We need a lot more housing and we need it quickly.
But housing starts and housing permits, imply a run rate of 1.3 million at an average annualized base pace. So as those homes get completed and we decelerate down to that 1.3 million, you are going to see a lot of men, 25 to 54 discharged and looking for work in the open market that will make the unemployment rate go up.
Now, I want to say this, and this is really important. The economy will slow, but it\u2019s not yet certain that we\u2019re going to go into recession. If we do go into recession, it\u2019s going to be modest and it will not have unemployment rates, that you would normally associate with the recession.
Now you\u2019re a younger guy, Dave. You remember two recessions, the pandemic where it went to 14% and the great financial crisis where it went to 10%. We\u2019re not going to get anywhere near that. We\u2019re talking 5%, that would\u2019ve been considered full employment 20 or 40 years ago.<\/p>\n
Interesting.<\/p>\n
So again, to circle back, those demographic changes I have now come home, it\u2019s altering our own understanding of how the economy works and what constitutes full employment.
We have a 3.4% unemployment rate. My estimation of full employment is 4.4%. When I was in college, it would\u2019ve been 6%. Indeed, times passed and things have changed and they require new policies.<\/p>\n
You hit on something, I want to get back to the labor market, but you hit on something about a recession and that it might be a mild one.
I think one of the common questions we have from our audience is how do you define a recession? Let\u2019s ask an economist.<\/p>\n
Okay. I could tell you it\u2019s easier to talk about what it\u2019s not. It is not two consecutive quarters of negative growth. We define recession in the United States economy very differently. It\u2019s a broad and synchronized decline across a number of discreet economic variables such as reemployment, retail sales, hotel, wholesale sales, industrial production. We could go into it deeper, but that essentially nails what a recession is.
And here\u2019s what the difficulty is. If one were to look at, say, housing, I think it\u2019s pretty honest. We\u2019re in recession right now, even if the unemployment\u2019s not there because residential investment declined by 26.7%, in the fourth quarter. Manufacturing is very close. It either is or soon will be. But you look at tech, you look at life sciences, you look at the broader service sector, not so much. Right?
I travel a lot as an economist, the best part of my job is I get to go around the North American and global economies. I\u2019m not stuck in the glass skyscraper as I was for many decades. It\u2019s made me a better person and a better economist. I get a good idea of what\u2019s going on out there. Try going to an airport right now. Just try. It\u2019s a difficult proposition. I mean, there\u2019s no recession at the airport, right?<\/p>\n
No way.<\/p>\n
It\u2019s happened.<\/p>\n
Oh my God. It\u2019s crazy, yeah.<\/p>\n
So if we do have a recession, we\u2019re going to have a non synchronized recession or what some might call, a rolling one.<\/p>\n
Okay, a rolling one. Because that makes me wonder what purpose or what use does the word or term definition of recession mean then, if it isn\u2019t ubiquitous across the economy, should the average American really care if we\u2019re in a, quote, unquote, \u201crecession\u201d or not? Or should we really just be thinking about the individual sectors of the economy that impact our individual lives?<\/p>\n
Okay. There\u2019s two things here. There\u2019s the public and then there\u2019s investors. The public should care because we need to get that downturn, you will get an increase in unemployment and remember one person\u2019s recession is another person\u2019s depression. Right?
Now, if we\u2019re talking about investors, that\u2019s a different thing. We definitely need to be looking at the different ecosystems out there because they\u2019re going to have different realities and the deeper you dive down to the zip code level, the different outcomes you\u2019re going to have.
I live in Austin, Texas. My job is in New York, basically I\u2019m all over the place. I live in the tech utopia, but this Austin\u2019s the boom town. We don\u2019t have enough people to fill the jobs. We don\u2019t, I mean, the unemployment rates and the low twos, we don\u2019t have enough homes to meet the needs of the people who live here. We don\u2019t have enough people. So that\u2019s going to be very different than Huntsville, Alabama.<\/p>\n
Right.<\/p>\n
Right? Or Kansas City, Missouri or Kansas City, Kansas for that matter. So it really does matter whether we\u2019re in a recession or not. Now, before the time you and I inhabited this, the third stone from the sun, federal government said is the fiscal and monetary authorities did not respond the way they do now.
It was thought that, well, markets automatically clear, markets are perfect, and what the best thing we should do is nothing. Just let the market clear, liquidate stock, liquidate labor, liquidate everything, because that\u2019ll get us back on the virtuous cycle.
Well, we had some problems along the way, and markets are not perfect. They don\u2019t perfectly adjust. I know for some people those are fighting words, but that\u2019s just the way that is these days.
And we need to be able to identify when the economy slowed down in order to use the balance sheet of both the fiscal authority and if necessary, not always the case, but if necessary, the monetary authority, the central bank, in order to stimulate the economy to get the animal spirits moving again and create the conditions for resumption and expansion of overall economic activity.<\/p>\n
That\u2019s a great segue to my last question about monetary policy. Given what you said at the top of the show that a lot of this is demographic driven and that we have basically too many jobs right now for the working population.
How difficult is the Fed\u2019s job going to be? They seem particularly concerned about wage growth, which you said would be three to 4%, and a lot of people are saying they need to, quote, unquote, \u201cbreak\u201d the labor market before they stop raising rates. So how do you see this all playing out?<\/p>\n
There\u2019s a couple of things here, and this discussion works on our travels on a couple of different levels. The first thing is the Fed does need to generate additional labor slack in order to cool the economy. We were looking at the employment costs index through the end of the fourth quarter. It\u2019s up 6.3% on a year ago basis, that\u2019s clearly too strong, and that\u2019s on the edge of wage-price spiral terrain. So policy needs to move in further into restrictive terrain.
That means the policy rate\u2019s going to increase. We think three consecutive 25 basis point increases in March, in May, and in June. That\u2019ll bring us to a potential peak of 5.5% with risk of moving higher. It\u2019s going to depend on the evolution of the data.
Now, the problem here is that the inflation that we\u2019re seeing is a bit different than that, which we\u2019re going to see going forward. Most inflation we\u2019ve seen has to do with the supply of shocks and unleashed by the pandemic, and then the policy response put in place to mitigate those shocks.
April 2020, unemployment rates at 14%. You know what these inflation problems are well worth an unemployment rate at three point a half percent as opposed to 14%. So I do the same thing over again essentially, perhaps with some small differences on the margin.
Now, as the goods inflation is turned to deflation, we\u2019re now shifting to demand for services, hence why it\u2019s a problem at the airport or at the mall or the grocery store, right? Because demand\u2019s still strong. That\u2019s where we have to deal with what\u2019s going to be higher on employment through the middle. That\u2019ll start in the middle of the year and increase probably through the end of next year.
Now, there are things going on with respect to the supply side of the economy that don\u2019t have to do with monetary policy or fiscal policy that have to do with some of the broader economic and strategic tensions out there in the world. It\u2019s very clear that at the very least we\u2019re going to be engaging and selected to coupling from China. The G7 are clearly moving in that direction. That means, goods specifically higher priced, sophisticated goods are going to get that much more expensive and those are going to be passed along here in the United States.
That means that 2% inflation target is likely to give way to a three or perhaps three and a half or 4% inflation target, because we just don\u2019t have enough people, and we\u2019re engaging in this decoupling from hyper-globalization to a globalization that\u2019s defined by regionalization. Well, that means rates are going to meet higher than what they\u2019ve been for the past 20 years.
Most of your lifetime, what you know is inflation at around one to 1 and a half percent per year and very low interest rates that in real terms are negative. That\u2019s not going to define the next 20 years for you. You\u2019re going to be moving and living in a very different time, a very different era. Essentially the era of 1990 to 2020, the era of hyper-globalization has effectively come to an end.
We\u2019re moving into a different era that requires different policies and quite frankly, different people with different analytical frameworks and economic models. So we\u2019re going to have a pretty big turnover here, and that\u2019s why your question about why the public should care? Is spot on. But the public is different from investors, and so the two right now are traveling on parallel lines.<\/p>\n
All right. Well, Joe, thank you so much for being here. We really appreciate you joining us. Hopefully we can have you back someday to expand on this topic a bit more.<\/p>\n
Sure. Thank you very much.<\/p>\n
All right. Big thanks to Joe for being here. Obviously, the labor market is not my area of expertise, but I\u2019ve been trying to learn a bit more about it given its importance in what the Fed is doing in monetary policy in the US, and because that has huge impacts on the real estate market.
I really want to understand more, and I think the main takeaway for me is that the interest rate hikes that have been going on for nearly about a year right now are really just starting to be felt in terms of the labor market.
And although we\u2019re seeing these sort of surges in jobs recently, it\u2019s probably, according to Joe, Joe thinks that we\u2019re going to start to see the unemployment rate tick up over the next couple of months, starting probably mid-year is what he said. And as a result, that should help inflation. That is Joe\u2019s opinion, and I think that\u2019s an interesting good take. We\u2019re obviously don\u2019t know what\u2019s going to happen, but I think he\u2019s very informed and offered some really interesting opinions there.
So thank you all. Hopefully you like this episode. If you have any questions about it, you can always hit me up on Instagram where I\u2019m @thedatadeli. We appreciate you listening and we\u2019ll see you next time for On The Market.
On The Market is created by me, Dave Meyer and Kailyn Bennett. Produced by Kailyn Bennett, editing by Joel Esparza and Onyx Media, researched by Pooja Jindal, and a big thanks to the entire BiggerPockets team.
The content on the show On The Market are opinions only. All listeners should independently verify data points, opinions, and investment strategies.<\/p>\n