Good news on employment may not last
The surge in employment last month now closes the inconsistency gap that had developed in recent months between forward labour market indicators and actual labour market performance. It’s also consistent with the step up in GDP growth in H1’14.
Despite the gloss the ABS has tried to cast over the numbers, the fact remains something is seriously wrong with current data collection methods – and timely tracking of the economy won’t be helped if the Abbott Government forces the ABS to cut back its operational budget even further.
That said, the good news is that there is likely some signal to be gleaned from all the statistical noise. Importantly, the drop back in the unemployment rate is more consistent with the tentative signs of improvement across a range of employing indicators over recent months – which in turn, finally provides confidence in the positive signal these indicators were providing.
While the pick-up in the ANZ measure of job advertisements has so far been quite modest, the improvements in the National Australia Bank and Dun and BradStreet surveys of hiring intentions have been more notable. The NAB index is now close to long-run average levels, while the (more volatile) D&B index is at an above-average level.
The belated labour market improvement is also consistent with the pick-up in economic growth in recent quarters. Annual non-farm GDP growth accelerated to its long-run average of 3.3% p.a. over the first half of 2014 – from around 2.5% p.a. in the second half of 2013- albeit helped by a lift in resource exports and inventories, neither of which is likely to be sustained. Given the typical lags between economic growth and the labour market, some lift in employment growth was due.
Of course, all this begs the question – can recent improvements in the economy and labour market be sustained? On the positive side, this month’s good news on employment may well be reflected in a lift in consumer sentiment next month – which took a tumble this month after the shock surge in the July unemployment rate to 6.4%. The lagged effects of the H1’14 lift in economic growth could also flow through for a few more months yet.
That said, the major worry remains broad-based weakness in underlying demand, with neither business investment, consumer spending nor public demand showing signs of picking up speed anytime soon. What’s more, given the recent easing in home building approvals so far this year, dwelling investment may well go backwards in the September quarter. Australia is increasingly reliant on home building to carry the economy, despite the fact that affordability conditions have already deteriorated notably, and our track record in expanding housing supply in the face of land and development constraints has, over the past decade, not been great.
Barring a sudden lift in demand, the risk is that the economy slows back to a modest below-trend pace of growth in coming quarters as the one-off boost to growth from the ramp up in resource export volumes starts to level out. And under that scenario, it’s likely that last month’s improvement in the unemployment rate will be reversed.
With the Reserve Bank loath to cut interest rates further in the face of still strong house price gains, the hope is that the A$ is now in the process of falling to more competitive levels. The break below recent support at $US92c is a hopeful sign, though perversely, the strong August employment report could at least temporarily slow the A$’s decline.
For more market insights from David Bassanese, go to the BetaShares blog. For more information on BetaShares products, visit the main BetaShares site.