Tight labor market and low housing inventory support inflationary pressure

ISRAEL - In Brief 20 Jun 2022 by Jonathan Katz

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Strong job growth in May supports tightening Unemployment in May increased to 3.5% from 3.1% in April due to a positive development: labor participation improved sharply to 63.2% from 62.2% (more job seekers). The more important statistic is the employment ratio (number of employed divided by those above the age of 15) which increased to 60.8% in May from 60.1% in April. 55 thousand new job were created in May. In short: all good news in the labor market supportive of our call for a 0.5% rate hike on July 4th and 2.75% one year from now. Housing inventory remains low: rental prices to push higher Residential starts accelerate but completions remain way below demand. Starts reached an annual level of 72.7k units in Q122, above the 63.3k pace for all of 2021. Now for the bad news: Residential completions remained low, reaching only 47.3k, slightly above the 2021 pace of 46.9k. We note that the number of additional households per year is estimated at 55-60 thousand. This gap between starts and completions has been a steady and growing one, resulting in 160k units currently under construction in Q122, up from 151k last quarter. Implications: What counts for available inventory and housing supply are completions. Low completions are supportive of further pressure on housing rental prices factored into the CPI (23% of basket). Could we see a surge in completions in coming quarters? This is unlikely in the short run, as financing projects is becoming more expensive and contractors fear declining demand.