The RBA gets a license to lop

The unemployment rate has finally caught up with every other indicator of the labour market that has suggested a softening in employment conditions since the middle of the year.

The unemployment rate rose to a 30-month high of 5.4 per cent in September and even though employment rose a superficially reasonable 14,500 in September the net result is a worry for the economy. It must be highlighted that the context of the rise in employment in September was a disconcerting fall of 26,000 in employment of the prior three months.

In other words, the net change in employment over the past four months has been a fall of 11,500 – a very disconcerting figure given the ongoing growth in the working age population.

Aggregate hours worked rose a moderate 0.5 per cent in September but are down 0.9 per cent on the level of April 2012 suggesting that spare capacity in the labour market is starting to build. In trend terms, aggregate hours worked has fallen for five straight months.

The continued decline in the ANZ job ads series spells more weakness for jobs in the months ahead. Indeed, if past correlations hold, the ANZ series suggests no net change in employment over the next three to six months and the unemployment rate could reach around 5.8 per cent by early 2013.

There is no doubt now that the RBA is regretting not cutting interest rates earlier. That aside, it can, as it has shown in the past, play catch up very quickly which makes an interest rate cut at its November board meeting close to certain.

It is not inconceivable that the labour market weakness, together with the risks from the global economy, the still strong Australian dollar (which actually rose after the jobs numbers) and a soggy growth momentum in the economy will see it consider a 50 basis point cut, a bit like the one it delivered in May. It remains more likely that the cut will be 25 basis points with the RBA always able to move again the following month, but if it is getting concerned about the risks to the economy, it just might take the more drastic action of going 50 and setting the cash rate at a new historical low of 2.75 per cent.