Last week marked the third time this year the Fed has decided to raise interest rates and to celebrate, we thought it would be a good time to talk about some interesting trends we’re seeing in the Massachusetts economy. Generally speaking, the strength of the U.S. economy, which continues to gain momentum, has been a driving force behind the Fed’s decision to raise rates. GDP growth is strong, consumer sentiment is up and the unemployment rate remains low. In Greater Boston, the labor market is humming along as employers are beginning to struggle to find workers. The chart below displays historical unemployment rate data for the U.S., Massachusetts and the Boston metro area.
If there was ever a single metric most people look to in order to gauge an economy’s health, it’s the unemployment rate. Greater Boston’s unemployment rate has been hovering below 3.5% for the last year; its lowest level since the early 2000’s. However, making any conclusions based on a single metric can be dangerous. An NFL scout wouldn’t evaluate a player only on their 40-yard dash time (usually) and the same logic works here.
Massachusetts’ flat unemployment rate is actually masking certain underlying trends, specifically the number of available workers. To better understand the forces at play, we need to look under the hood. When unemployment is this low, economists generally expect wage gains. However, real earnings for workers both nationally and in Massachusetts have remained relatively flat.
While earnings growth has begun to pick back up, it is still below what we would expect given how hot the labor market is running. A few theories have been thrown around as to why workers’ earnings have been disappointing. Employers could be offering more lucrative benefits packages in lieu of higher wages or desperate firms are not finding enough trained workers to meet their needs. A compelling theory, at least for Massachusetts, is there is a lot of “hidden slack” in the market. Hidden slack refers to labor pools that are not calculated in the traditional unemployment rate. Discouraged workers are a key component to slack in the labor markets. While discouraged workers are physically able to work, they are not actively looking for employment for one reason or another. Underutilized labor or part-time employed for economic reasons is another potential source of slack in the labor markets, as these workers would prefer to work full-time. Economists have been theorizing that these workers are finally returning to the workforce in full-time positions, encouraged by the strong economy and finally able to find the opportunities to fully participate. These returning workers will put upward pressure on the labor force. The chart below shows the labor force participation rate for both locally and nationally.
The recent sharp increase in the Massachusetts’ data represents the fastest 6 month increase in the state’s labor force participation rate in at least four decades. Between January and August of 2018, the Bureau of Labor Statistics estimates that an additional 147,000 workers were added to Massachusetts labor force, which is roughly the equivalent to the population of Springfield, MA. While Massachusetts has been booming, the U.S. participation rate has remained stubbornly flat for the last few years. The plateauing of the national metric could be due to a shifting demographics. As the population ages, older citizens leave the labor force through retirement while new participants, whether it be population growth or discouraged workers, enter at around the same rate. That said, Massachusetts is struggling with the same demographic shifts when it comes to an aging population.
If we look at the data on the state level, Massachusetts’ grown patterns are even more remarkable. The chart below looks at changes in the labor force by state during the first six months of 2018.
Massachusetts’ labor force growth of 4% is far ahead of any other state in the Union. While we can’t yet pinpoint the specific cause of this spike, we can discuss some possibilities. Increased population growth, either natural or via migration, could be driving these recent trends. Massachusetts has seen some large companies move in as local markets have become hotspots for the tech and biotech industries. Given Massachusetts has some of the best post-secondary schools in the country, companies have been flocking to the Boston area. One of the reasons economists have cited when looking at flat wage growth despite a tight labor market is the difficulty some companies have finding workers who have the skills they require, so it follows that these companies would move closer to labor that matches their needs, leading to the Boston area retaining more of its college graduates. However, the Bureau of Labor Statistics population estimates put Massachusetts growth as squarely average. The most likely reason, therefore, appears to be workers are finally getting off the sideline and returning to work, bolstered by Massachusetts strong economy.
A rapidly expanding labor force can shock a market in a few ways. Remarkably, job growth in Massachusetts and Boston has kept up with labor force growth. Households with new sources of income spend money, increasing aggregate demand which then leads to increased prices. While it should lead to some upward pressure in most consumption categories, one of particular interest to Hunneman Research, and Boston for that matter, is multifamily rent. The chart below looks at a labor force and rent indices, starting in September of 2014.
Several interesting trends arise. It is worth noting the separation of growth in the last few years between Lower-Mid quality housing and Luxury housing. Lower-Mid apartment rents have grown by more than 7% since 2017, compared to 5.5% for Luxury and 6% for Upper-Mid rents. However, things really begin to pick in 2018. Rent growth in the three listed apartment classes began rising only a month or two after the local labor force took off. While labor force growth is certainly not the only reason, new sources of income for households in combination with improving wage growth and an income shock to consumers through last year’s tax cuts has created an inflationary environment for consumers.
For all of those economists out there we know correlation does not mean causality. While a hot labor market is usually accompanied by price inflation as households spend more of their new income and demand increases, there are other reasons apartment rents would increase. In fact, the sizable rent increase in early 2015 was not accompanied by a significant change in the labor force.
The size of labor market growth is good news for Massachusetts workers and landlords, especially as more firms are reporting problems finding labor to meet their needs. As rents and other prices continue their upward march, we should watch wage gains closely as they hold the key to whether this new labor market boom is built on match sticks or it turns in to solid economic growth for the Bay State.
This post was written by Hunneman Research Analyst, Joey Biasi.