The surge in U.S. job growth in recent months means that an additional 50 basis point rate cut by the Fed in November is likely off the table, and even a 25 basis point cut may be optimistic, in the view of John Chang, senior vice president for research services at Marcus & Millichap.
However, for CRE, rising employment is a positive, he said in a video. “It creates additional demand for housing, increased consumption for retailers, increased warehouse throughput and maybe, just maybe, it will put some of those workers back in offices.”
When the Fed announced a 50 bps rate cut on September 18, it drew praise for attempting to get ahead of any potential recession risks. However, the October 4 employment report revealed not only that job growth was stronger than expected, with 254,000 jobs added in September, but also that 72,000 more jobs were created in July and August than originally estimated – “a real curveball,” Chang said.
In addition, Chang noted, that the unemployment rate fell to 4.1%. And annual average hourly earnings rose 4% in September. “We are not in recession territory,” he said. “The signs of job softening have dissipated.” Inflation is moving toward the Fed’s 2% target. For these reasons, he considered further interest rate cuts unlikely.
He also did not view the increase in hourly wage rates as a cause of concern, noting that inflation peaked in 2022 and has been on a downward trend since then. “We always knew there would be bumps and potholes in economic growth,” he added.
In his view, the unexpected increase in jobs created and unforeseen Black Swan events like Hurricanes Helene and Milton, as well as the war in the Middle East and the port strike on the U.S. East Coast represent normal bumps and potholes in the road ahead for CRE investors.
Though investors might be concerned about whether the higher employment numbers might have a material effect on CRE or the Fed’s rate decisions over the longer term, Chang said he did not foresee a momentum shift, only the usual bumpiness.
“The probability that the overnight rates will be down by 100 bps or more by June 2025 remains high, and investors always need to keep their eyes on the horizon,” he said.