A soft answer to jobs ire

Unemployment figures are softer than last year but they're not weak. It'll take much more than this for the Reserve Bank to consider any rate cuts.

Employment rose a nice 10,400 in January, while unemployment was steady at a lowish 5.4 per cent. But hours worked eased a touch, reflecting the solid growth in part-time jobs versus a slight pullback in full-time employment. Jobs growth has been moderate in the last half year or so, but the softness is clearly less than either Treasury or the Reserve Bank has been anticipating.

Perhaps the best way to sum things up is that the unemployment rate, which hovered broadly in a 5 per cent to 5.25 per cent range over 2011 and the first half of 2012, is now hovering in a 5.25 per cent to 5.5 per cent range.

Softer, yes for sure. Weak? Not yet and maybe not at all.

In broad terms, the jobs numbers are catching up with the soft patch in the economy at the end of 2012, but are not so weak as to force the Reserve Bank to deliver an urgent interest rate cut on top of the easings over the past 15 months or so. The jobs market is such that the bank can cut rates but will only do so if the economic outlook worsens from here. The way the global economy is turning up, and given financial markets are on a solid bull run, the scenario for a further cut is unconvincing.

The leading indicators on the economy, including housing sector trends (prices and construction), the stock market, consumer and business sentiment are neutral to positive at the moment. The Reserve Bank acknowledged this with its interest rate statement this week, which together with the better news globally led to the 'on hold' decision.

Also in the mix is tentative evidence from the TD-MI monthly inflation gauge that inflation is edging higher. In the last two months, the inflation gauge has risen at an annual pace of just over 4 per cent and while there are some one-offs in these numbers, the Reserve Bank will be reluctant to cut if more one-offs come into the mix. The fact that the Australian dollar has also stopped rising means that some of the disinflationary impetus from imported prices might also have started to wane through the course of this year.

The end point is that the jobs market is soft but it is a long way from being weak. The unemployment rate needed to rise to 5.5 per cent (or more) for the Reserve Bank to deliver an urgent rate cut, meaning rates will be on hold a little longer. This is not to say the next move in interest rates is a lay down misre hike – there still could be a cut. But the run of news needs to deteriorate before any cut is delivered.