What Employment Numbers Are Signaling.

The Real Estate Espresso Podcast

What Employment Numbers Are Signaling.

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What Employment Numbers Are Signaling.

Welcome to the Real Estate Espresso Podcast. I’m your host, Victor Menasce. We regularly look at macroeconomic data to forecast interest rates. Interest rates affect one of the three main variables associated with any project. Those three variables are: number one, construction costs; number two, rent; and number three, capital costs. Everything else is a rounding error by comparison.

We’re expecting new payroll data from the Bureau of Labor and Statistics later this week. It’s actually delayed because of the partial government shutdown. However, those numbers are full of approximations and adjustments. To me, the most reliable data actually comes from private enterprise, which is the real-time payroll data from ADP. The ADP data is not just a survey or a statistical sample; it’s real data taken from real payroll transactions in the past month.

We’re going to start with the employment data, look at unemployment information, and then bond yields. We know that the Fed funds rate has dropped 75 basis points in the last year, but the yield on the 10-year Treasury has hardly budged in spite of everything that’s happened. So let’s start with the payroll data and then analyze from there.

The latest ADP National Employment Report, published on February the 4th, indicates a significant cooling in the U.S. labor market. Private sector employment grew by only 22,000, falling well short of the Dow Jones consensus forecast of 45,000 jobs. Considering the size of the US economy, that’s very, very small job growth.

If we look by sector, modest growth was almost entirely propped up by education and health services, which added 74,000 jobs. Without that surge, overall private sector numbers would have been significantly negative. We saw major declines in professional and business services. We saw a drop of 57,000 jobs in that sector. Manufacturing continued its long-term slump, losing another 8,000 jobs. Notably, that sector has not seen job growth since March of 2024.

Despite the hiring slowdown, wage growth remained relatively stable. Those who kept their jobs saw an average four and a half percent year-over-year increase. Those who changed jobs saw a slightly moderate growth of 6.4 percent, down from 6.6 percent in December. Medium-sized companies, those between 50 and 250 employees, were the primary drivers of growth, adding 37,000 jobs. In contrast, large employers shed 18,000 positions and small firms remained flat.

Now, we’ve also seen a lot of significant announcements of job reductions in the tech sector. I’m thinking of Amazon, Meta, and others. Those are not going to show up in the employment numbers for a number of months because those folks would have received in some cases six months, in some cases even nine months’ worth of severance. When severance runs out, that’s when they will show up in the unemployment number. So there’s a delay.

Dr. Nela Richardson, ADP’s chief economist, noted that job creation in 2025 took a significant step backwards with only 398,000 jobs added for the entire year, compared with 771,000 jobs in 2024. So by sector: education and healthcare up 74,000; financial services up 14,000; construction, surprisingly, up 9,000; manufacturing down 8,000; and then professional and business services down 57,000.

So when we look at the jobless claims, we saw that in the last week of January, initial claims were 231,000. That’s up by 22,000 from the previous week. Continuing claims rose 25,000 to 1.844 million. That continuing claim number has remained stubbornly high for a number of months.

So in the wake of the ADP announcement, Treasury yields shifted lower as the market reacted to the signs of a rapidly cooling labor market. That trend is amplified by a flight to safety as investors moved out of riskier assets like equities into the relative security of government bonds. The overall yield curve shifted downwards, although most of that was at the short end of the yield curve.

The two-year Treasury today is trading at around 3.49 percent. That’s down five to seven basis points. It’s very sensitive to Fed policy, and the markets are now pricing in a much higher probability of a rate cut in June. The 10-year Treasury sits at 4.22. It’s down about 8 basis points. It hit an intraday low of 4.16 before stabilizing. The 30-year Treasury is at 4.85. It’s down only a few basis points.

And of course, the key drivers of the shift there are clearly these recessionary signals. A report of only 22,000 jobs, when you combine that with a very sharp drop in the number of job openings, is fueling fears that that so-called soft landing might in fact be turning into a sharper downturn.

Markets shifted from pricing in roughly 50 basis points of rate cuts in 2026 to approximately 58 basis points. There’s now a 91 percent implied probability of a 25 basis point cut at the June Federal Reserve meeting. And then, of course, by then we will have a new chair of the Federal Reserve.

Bond yields have been influenced by the nomination of Kevin Warsh to the Federal Reserve. Investors are speculating, and let’s be clear, this is completely speculation, that while Kevin Warsh is widely expected to drop rates, he’s also expected to reduce the size of the Fed balance sheet.

One thing we look at is comparing the two-year Treasury and the ten-year Treasury. That spread has widened to approximately 72 basis points. That’s nearly a four-year high. The steepening occurs when short-term yields fall faster than long-term ones, often a signal that the market expects the Fed to start easing policies sooner to support the economy.

Later this week we will have the official non-farm payroll data and the CPI report, where I’ll be focused much more not on the headline number, but in fact on the revisions to previous reports. That’s much more telling.

So when I look at all of these things together, I continue to see downward pressure on interest rates, even with all of the tariff and trade uncertainty that’s happening in the global economy.

As you think about that, have an awesome rest of your day, go make some great things happen, and we’ll talk again tomorrow.

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