VIPs
- Healthcare and leisure & hospitality represent 52% and 50% of the ADP’s headline gains in employment in October and November, respectively; however, record hospitalizations and deaths will stall these job growth engines as elective procedures and re-openings are delayed
- The ISM-New York Employment Index fell from 58.4 in October to 34.6 in November, the largest decline on record; most firms view the current business climate as worse than normal in the NY Fed’s Services survey, a troubling sign for a sector representing 82% of state GDP
- Per Confounded Interest, average office occupancy in the nation’s 10 largest cities hit a pandemic low of 17.6% the week of November 25; nine of 12 Fed districts report continued office sector weakness as urban flight and work-from-home threaten a return to normal
“Tongue twister” was recorded as early as 1855 in a doctor’s account of settlers at Missouri’s Rock River. Apparently, the white settlers had a tough time pronouncing the native Sioux name for the river, Inyan Reakah. The doctor called it a real twist to the tongues. That same year, Alexander Melville Bell published Letters and Sounds: An Introduction to English Reading. His work contained one of the most popular tongue twisters of all time: “she sells seashells”…“by the seashore” was a later addition. Bell labeled these tricksters “elocution exercises” and “alliterative puzzles,” not “tongue twisters,” which didn’t appear until 1890’s “Peter Piper picked a peck of pickled pepper-corns.” Children are why these vexations exist — say one quickly, and repeatedly, and they melt into pools of laughter at adults making asses of themselves. What’s not to like?
Why don’t you give it a go in your home office? No one can hear you. Repeat today’s left-hand chart title five times fast: “Sizable Services Stall Staffing.” You wouldn’t have gathered that from the broad-brush commentary that accompanied yesterday’s ADP Employment Report: “Job growth remained positive across all industries and sizes.” Yeah. NO. The largest private companies in the service sector, those with 1,000 workers or more, registered a decline of 2,000, the first in seven months, following six consecutive gains (red line). In fact, the smallest private goods-producers, with 1 to 19 employees (not illustrated), also posted a drop of 8,000, the first in three months.
Don’t get us wrong, we’re not cherry-picking weak data. Industry gains were broad-based in the ADP report. But the pace of job creation slowed, most notably across the critical service sector. Interestingly, the two major engines of job growth in the last two months came in healthcare replenishing staff and leisure & hospitality reopening. Together, these two industries accounted for 52% and 50% of ADP’s headline gain in October and November, respectively. We dare say that the risk of a reversal of those hires in these labor-intensive areas is not priced in any way, shape or form in the current sell-side consensus outlook.
Yesterday saw not only hospitalizations cross the 100,000-milestone, a near double from November 3rd. But fatalities hit a record high. These are the statistics that make headlines and force the hands of even the most relaxed states. Healthcare job creation will withstand a fresh blow as elective procedures get postponed anew. And spreading stay-at-home orders and shutdowns will arrest the advances in leisure & hospitality.
The city most affected, which keeps thwarting one of our ability to visit it, is New York, especially the New York City metro area which boasts the biggest service sector footprint in the nation. The Empire State’s private service sector accounts for 82% of gross state product, the highest for any state and well north of the 70% nationwide average.
In November, the New York Fed’s Services survey continued to reflect an extremely depressed business climate with a vast majority of firms indicating the operating environment was worse than normal (blue line). Not coincidentally, the current business climate in New York and payrolls at the largest service firms have drawn the same path in 2020.
As if on cue, the ISM-New York employment index registered its biggest decline on record; the -23.8-point swing relapsed employment from 58.4 in October to 34.6 in November (green line). Based on these guides, and if ADP had reported at the state level, we would wager that New York’s largest service company payrolls have shifted back into downsizing mode.
The Fed’s Beige Book echoed ISM-New York on the labor front. The New York Fed District cited a major employment agency that “reported that hiring has remained moribund and anticipated a rough patch through the winter but expressed hope for a pickup later in 2021.”
Zooming out — excuse the pun — Work from Home (WFH) is the clearest threat to the next generation of new office construction. As we recently noted, apartment rent headwinds were not contained to New York; they were omnipresent in nearly two-thirds of the top 100 cities and rampant in the top 25 major cities.
Since its 2015 inception, the Zillow Observed Rent Index has corresponded to the path of private office construction spending; the year-over-year rates of the two metrics have a robust .76 correlation. The urban flight narrative intersecting with WFH has meant more workers living away from where the highest concentration of offices is domiciled.
It’s difficult to imagine a continued deterioration. And yet, Anthony Sanders of Confounded Interest, a real estate data blog, reported that the average office occupancy of the country’s largest 10 cities had hit a post-pandemic low of 17.6% in the week ended November 25th. At 24.2%, Dallas is the least awful while at the opposite end of the spectrum, San Francisco broke down to the single digits, to 9.9%. New York was not far behind, with the second-worst 10.5% showing.
At the risk of your thinking the worst of the coming downturn on Office is limited to the biggest cities, nine of the 12 Federal Reserve Districts reported weakness in their respective office sectors. In other words, it’s a story of National Negativity, Not a New York Novella. The absent office building cycle is poised to morph into an extended slump.