Rate cuts would send the wrong message

A drop in consumer sentiment and a rise in the unemployment rate has fuelled Australia's economic pessimists, but there's more to the data than meets the eye.

Pessimism is building in Australia. Only this week, the market learned that consumer confidence dropped 5.7 per cent (December figures). A fall that, at least notionally, shows consumers at their most anxious in more than three years. Indeed, confidence is back down to where it was in the wake of the GFC! Meanwhile, business confidence has declined to its lowest point in over a year.

Legitimate questions can be raised, however, as to whether all of this pessimism is justified.

The economy isn’t booming. No one would suggest it is. Yet many of the main economic indicators still support the idea that growth remains around its trend, if not above. Not too hot and not too cold. At the very least, we are seeing nothing to support the more alarmist and negative commentary doing the rounds about a recession.

The latest jobs figures are a case in point. Many headlines widely proclaim the unemployment rate at a 12-year high; a lazy glance suggests that is indeed true. The headline rate is up at 6.3 per cent, something not seen since September 2002. What’s often forgotten, however, is that there are many more people participating in the labour market now. 

If we had the same participation rates now, as in 2002, the unemployment rate might be as low as 4.1 per cent! With that in mind, no-one could imply that the labour market is at its weakest in 12 years.   

In any case, it’s not even clear that the headline unemployment rate is actually up at 6.3 per cent. Remember that Australian Bureau of Statistics is having grave trouble seasonally adjusting data. The problems in the jobs data are well known, and we can’t pretend that these have been resolved. 

On the raw (or unadjusted) figures, the unemployment rate is sharply lower than the headline, at 5.9 per cent. Ordinarily, economists might put the difference between adjusted and unadjusted data down to the (generally) more volatile swings of the unadjusted data. Analysts can’t do that this time around, as the unemployment rate has held consistently near the 6 per cent mark for more than six months. No one could argue that this was a less reliable estimate than the adjusted figure showing 6.3 per cent. Indeed, with all the trouble the ABS has had, it could only plausibly be more accurate. It’s certainly less volatile.

In terms of job creation, the raw data -- that is, data not impacted by ABS seasonal adjustment problems -- shows 170,000 jobs created over the last year.  Not that the seasonally adjusted employment gain was bad: 42,000 jobs in November, 142,000 jobs created over the last year. These are very positive numbers.   

Yet they still don’t quite capture the underlying dynamics. What the economy is looking at is the strongest November jobs gain in four years. Annual growth itself, on the raw figures, was 170,000. Whichever way you cut it, jobs growth was solid; over the month we saw the best November jobs gain in seven years!

While analysts will still need to be cautious on the figures, this latest result does support the idea that the labour market is improving on otherwise trend economic growth (as the non-mining economy accelerates). The alternative market narrative -- that the declining terms of trade is leading deterioration in the economy -- is dominant but lacks supporting evidence.

Market pricing for further rates cuts has firmed up over the last week. The futures market is now fully pricing in a cut of 25 basis points by April, with a 40 per cent chance of an additional cut later in 2015. Yet this latest employment result suggests policymakers should be cautious in easing policy again. Previous rate cuts have acted to destroy, not lift, confidence and there is little to suggest that would change in 2015 -- a serious problem given the already fragile state of consumer and business confidence. This is a nation that needs hope in the future and a rate cut would send the wrong signal.

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