Employers Leveraging Tax Breaks to Strengthen Payrolls

Employers Leveraging Tax Breaks to Strengthen Payrolls; Real Estate Investors Expected to Take Advantage of Narrowing Low Interest Rate Window

February’s employment report shattered expectations as 313,000 jobs were created during the month. Corporations are expanding headcounts after receiving significant cuts to their tax base, while also gearing up for increased demand from consumers facing smaller tax obligations. The economy has added more than 500,000 jobs during the first two months of this year, the largest opening since 2012. Momentum in the job market should propel strong first-quarter GDP growth, which has been lackluster during several years during the current recovery.

US Employment Trends - December to February
US Employment Trends

Builders added 61,000 jobs last month as seasonally warm weather likely inflated the headline number. Homebuilders are racing to meet demand from buyers while interest rates remain low. In January, housing starts were 7.3 percent above the year-ago level, and a mild February will like result in another strong year-over-year figure. The figures paint a mixed picture for homebuilders, however, as healthy employment gains could influence the Fed to tap the brakes on the economy more abruptly than currently forecast.


Annual wage growth, meanwhile, dipped back down to 2.6 percent in February, which should give the equity markets some confidence that inflation is not poised to increase beyond the Fed’s ability to manage it. A surge in the participation rate, which climbed to 63 percent as 800,000 people entered the workforce, kept employers from competing with other firms to attract talent. As a result, the unemployment rate remained at a still-low 4.1 percent.


How does February’s blockbuster jobs report impact real estate investment?

For residential investors, the jobs reports so far this year are both good and bad news. There is little doubt the Fed will raise interest rates at least three times in 2018 and now a fourth increase is firmly in play. As the cost of capital rises, deals that pencil out utilizing leverage are becoming more difficult to locate, which will push some do-it-yourself investors to the sidelines. Nonetheless, interest rates remain relatively low by historical standards, and January’s stock market volatility could encourage diversification. We expect another strong year of property performance, with rent growth outpacing inflation in most markets and vacancy remaining lower than historical averages.

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