Swings and roundabouts leave rate watchers guessing

Elastic monthly jobs data mean a bird's eye view is the only way to get a sense of the economy’s direction. But wider data indicates another rate cut could be seen as early as next month.

The hugely volatile jobs data in Australia has been very hard to interpret with one month strong, the next one weak and the next one something in between. Cutting through the extreme volatility in the monthly data leads one to a point where it is fair to say that the labour market is soft and at some risk of weakening further.

At face value, the monthly jobs numbers are too volatile to gauge a trend. The 36,100 fall in employment in March followed a rise of 76,000 in February, a rise of 13,100 in January and a fall of 2,100 in December.

It is perhaps best to have a look at some longer terms trends to get a better feel.

To that end, over the first three months of 2013, the average monthly jobs gain has been 17,000. If the December reading is included, this drops to an average monthly gain of 12,200. See the problem?

That said, the recent net gains seem solid enough given that in 2012, the average monthly gain in employment was 12,500 while in 2011, the average gain was just 4,200 jobs per month.

It is well established that to take account of population growth, the economy needs to create around 15,000 to 18,000 jobs a month to ensure the unemployment rate is steady over the medium term.

The particularly soft jobs data in 2011 and 2012 highlight why the Reserve Bank was cutting interest rates at that time and how, to some extent at least, that easier monetary policy is now showing in a pick up in jobs growth.

That said, there is a more worrying trend emerging in the unemployment rate. It rose to 5.6 per cent in March, to be at its highest rate since November 2009. It marks an edging up in the unemployment rate since March and April 2011 when it was a low 4.9 per cent.

A 0.7 per cent rise in the unemployment rate is significant and there are an increasing number of economists now forecasting the rate to hit 6 per cent by year end. If these forecasts look like being correct or indeed, turn out to be correct, get set to see further interest rate cuts.

Going back to the earlier point, which is more reliable? Job creation in the last three months which is looking to pick up, on average, or the unemployment rate which is rising to levels that are increasingly undesirable?

In a sense, even this exercise is not all that helpful and this is where it is prudent to look at a range of other economic indicators to get a take on the general economic momentum in the economy.

Those other indicators show a softening consumer sentiment, a dip in business conditions, a stalling in house price gains and a drop in job advertisements. While retail spending is picking up strongly and housing construction is also rising, the mining investment boom is loosing some of its bang and in the not too distant future, may no longer add to economic growth.

These indicators leave the door open for the RBA to cut interest rates, perhaps as soon as next month.

The RBA and most respectable economists would be more comfortable with the unemployment rate around 5 per cent, perhaps even a touch lower given the current industrial relations landscape. Wages growth is currently moderate and consistent with ongoing low inflation, so the economy can probably grow a little quicker without threatening the RBA inflation target.

To that end, policy settings should be easy which is where the RBA has set monetary policy with its round of interest rate cuts. This should be enough to support the pick up in growth which is essential if the unemployment rate is to be driven lower, but it remains to be seen whether this assessment is correct.

The fact that interest rates have been on hold since December 2012, the Australian dollar is high, the unemployment rate is higher and inflation is low, gives the scope for a further monetary easing.

Critically important in determining whether or not there might be another cut is the March quarter consumer price index which is to be released on April 24. Recently I wrote how low the CPI is likely to be for the March quarter (Australia’s low rate holding pattern, April 1).

If the CPI does in fact come in at 0.5 per cent (or less of course), an interest rate cut will certainly be on the RBA Board table for debate. Global developments over that next few weeks will also be crucial. On balance, the RBA is likely to hold, but there is a growing risk that there just might be one more interest rate cut.

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