• The unemployment rate in June was 5.2%;
• This is too high, with the forward indicators suggesting some further slowing in the jobs market in coming months;
• There are reasons to be positive about the economic outlook;
• The RBA has made it clear that unless the labour market improves further rate cuts will be needed.
I can only dream
I can only hope
That one day I will see
A beautiful reality‘’
Singers like Sia can deal in dreams and hopes. Central Bank Governors have to deal with reality. And in economics, the rubber hitting the road reality does not become more screeching loud than the jobs market numbers. For those that like to dream the June labour market number provided hope for a beautiful reality. While the number of jobs was broadly unchanged in the month, there were more full-time roles. And this came after the Statisticians found a few more jobs on the books in the preceding month. The participation rate remained high. And despite the negative economic stories of recent times the unemployment rate remained unchanged at 5.2%.
But putting down the microscope used to view the most recent numbers and stepping back to look at the bigger picture provides the sight of an Australian economy moving at a below trend pace. Weaker demand for products and services eventually means less demand for workers. The growth in the number of job ads has been slowing over recent months. Certainly things are not bad enough for firms to be retrenching workers in big numbers. But employers are indicating a toning down of recruitment plans. Firms are also reporting that labour is not the same constraint on profits as it was this time last year.
Workers are noticing the change in the labour market winds. They are becoming a little more concerned about unemployment. And they are no longer quitting their jobs in the same numbers as last year.
Further, there are still plenty of people looking for a full-time job. The underutilisation rate remains at a high level. As does the number of Newstart recipients. Part of the problem is that the economy has not been strong enough for long enough. It also reflects that the participation rate is near a record high. As is always the case when the economy is not moving full tilt, some areas do better than others. Right now the unemployment rate is low in NSW and Victoria (but starting to rise). It is too high in the other states.
At the end of the day a stronger economy means more jobs. And here there is cause for optimism. Domestically, interest rates have been reduced, taxes have been cut. The low $A means Australian goods and services have become globally more competitive. Relatively high commodity prices means mining firms are becoming more comfortable to invest (although they are starting to question whether the glass is still half-full). The only thing holding back even bigger spending on infrastructure is the lack of skilled labour and appropriate equipment. It increasingly looks like the worst of the decline in house prices is in the rear-view mirror. Globally, central banks are cutting rates, governments are priming the fiscal pump.
So Sia is right, there are reasons to hope and dream. But when setting interest rates the RBA has to deal with the jobs market reality. This is particularly the case in a world of too-low inflation. We are also only at the beginning of the residential construction downturn (particularly in NSW). And the Trade tiff is impacting global firms desire to invest, particularly in manufacturing. The RBA has made it pretty clear that if we don’t start seeing some movement down in the unemployment rate then even lower rates will be required.
The CPI number at the end of July will be the important signal if there is to be any near-term change in rates. But if the inflation numbers come in line with consensus then the RBA will be happy to sit back and keep an eye on developments in the unemployment rate (and wider signals on the domestic economy). For the economy-watchers, it is time (as that well known data scientist Eminem would say) to worry less about hopes and dreams and instead to, “Snap back to reality”.
Growth in hours worked in the economy has remained decent.
Annual Growth In Hours Worked
(3 month average)
Households are starting to become a little concerned about unemployment.
Consumer Concerns About Unemployment
(6 month rolling average)
Firms are indicating that they are less likely to employ extra workers, but so far there has been no big rise in redundancies.
Proportion Workers Expect Employer Cutbacks
(2 quarter average)
The participation rate has moved to be a record high.
National Participation Rate
As does the high number of people on Newstart allowances.
(6 month rolling average, nos 100,000)
One big picture trend is the rising proportion of part-time jobs (the ratio has stabilized in recent years).
Proportion Full-Time Jobs In Total Employment
But there has been a tick up in the unemployment rate this year.
One sign is workers are now less likely to quit their jobs.
Australian Workforce Quit Rate
(2 quarter average)
Firms are also starting to indicate labour is less of a constraint.
Proportion Firms Indicating Labour As A Constraint On Profitability
The high underutilisation rate indicates there is plenty of spare capacity in the labour market.
(3 month average)
The unemployment rate is low in NSW and Victoria (albeit rising), but there remains plenty of workers looking for jobs in the other states.
State Employment Rate
(3 month average)
Another big trend has been the significant rise of female and declining male participation (although male participation looks to be stabilising).
Participation Rate By Sex
We live in interesting times!
Peter Munckton - Chief Economist