WEEKEND ECONOMIST: Jobs today, GDP tomorrow

The strength in the labour market is a strong indicator of current economic conditions. With interest rates on hold and more full-time workers cashed up to spend, retailers can have hope.

In a week of mixed data, jobs were the winner, driving expectations for upwardly revised GDP growth.

The TD–Melbourne Institute inflation gauge rose 0.4 per cent in November after a 0.3 per cent rise previously and 0.1 per cent rise prior to that, its 13th consecutive rise and the strongest since May.

The report noted the main contributors of higher prices were fruit and vegetables, communication, petrol and rents. Partially offsetting price falls were noted for audio, visual and computing, holiday travel and accommodation, and meat and seafood.

With a lower increase from November 2009 ( 0.29%) dropping out of the calculation, annual growth in the inflation gauge rose to 3.9 per cent from 3.8 per cent previously, the highest since September 2008.

With the rise in the November gauge stronger than that in August, the 3 month pace rose to 0.76 per cent from 0.59 per cent previously, the highest since July. The latest 3 month pace is now above the 3 month pace for the mid-month of Q3 (0.61 per cent) hinting at risks of an acceleration in the quarterly headline CPI rate from Q3's 0.7 per cent in Q4.

The November gauge also suggests a re-acceleration in the underlying CPI pace in Q4 after a subdued Q3 and Q2 of 0.5 per cent. The trimmed mean of the inflation gauge rose 0.3 per cent after a 0.2 per cent rise previously and a flat result prior to that, the strongest monthly rise since May. The 3 month annualised pace of the trimmed mean rose to 1.9 per cent from 1.3 per cent previously, the highest since July.

While the trimmed mean annualised rate remains historically subdued, it has clearly risen from its lows, reinforcing our view that the subdued underlying CPI rate of 2.4 per cent in Q3 is likely to be the cycle low.

Total job ads (as measured by ANZ) rose 2.9 per cent in November (seventh consecutive rise) after a 0.7 per cent rise previously, continuing their uptrend for the
16th consecutive month but also with trend growth slowing in November to 1.1 per cent and 32.4 per cent (vs 1.4 per cent and 34.8 per cent previously), the slowest monthly trend pace since August 2009.

Newspaper job ads rose 0.9 per cent in November after a 0.1 per cent fall previously. However, the report continues to note weakness in newspaper jobs ads in recent months reflects a structural shift to internet advertising in Queensland, WA and South Australia.

Internet ads remained far stronger than newspaper ads, rising 3 per cent in November after a 0.7 per cent rise previously.

The deviation between total job ads (trend) and a 2½ year moving average historically has provided a seven month lead for annual employment growth. With the ongoing, albeit slowing, uptrend in job ads, this measure improved further in November to 5.4 per cent from 2.7 per cent in October, the strongest since August 2008.

This points to risks of annual jobs growth potentially rising further through 2011H1. However, the slowing in the monthly uptrend in job ads over the last three months (and a softening of private business survey employment indices) suggests an ongoing moderation in average monthly employment gains, where trend growth has recently slowed to 25.7k in October from a recent peak of 33.4k in July.

We continue to expect annual jobs growth to hold around 3 per cent through 2011H1 rather than accelerate further, but with an easing monthly uptrend, leaving the downtrend in the unemployment rate very slow given ongoing strength in labour force growth.

Housing finance to owner-occupiers continued to establish a base in October with a 1.9 per cent rise in approvals. That followed a 30 per cent retreat in new lending to owner-occupiers over the seven months to April as interest rate rises and a sharp wind down in First Home Buyer (FHB) activity impacted.

Over the six months to October new lending grinded 2.5 per cent higher. With the RBA leaving interest rates unchanged for the five months from June to October and the FHB wind-back largely over, housing markets were starting to settle through the September quarter.

This pre-dates the RBA's November interest rate rise and the rise in the average bank standard variable mortgage rate to 7.8 per cent from 7.4 per cent. Higher interest rates will undoubtedly have some dampening impact.

Beyond a near-term weakening, resilience in the housing market is likely to re-emerge (in the absence of higher interest rates).

Labour market strength, rising household incomes, strong population growth and pent-up demand for housing stock are all supportive.

The 197th Westpac–ACCI Survey of Industrial Trends was closed in the week ending December 3, against a backdrop of ongoing European turmoil, the November rate hike and a strong AUD/USD, up more than 5 per cent since the prior survey, but offsetting positives of stronger respondents' own activity indicators and the dissipation of election uncertainty, which was acute at the time of the prior survey.

The survey's Actual Composite Index, while below results seen over 2010H1, recovered 3.0 points to 52.5, surpassing the stalled expansion predictions in the prior survey's Expected Composite Index (50.2). At a level above its decade average (52.2) the Actual Composite Index signals manufacturing expansion at a slightly above trend pace in Q4 after a stalling of growth in Q3.

Employment jumped a further 54,600 in November, much stronger than expected (Westpac 25,000, consensus 20,000). Annual jobs growth has climbed to 3.7 per cent and 6 month annualised growth surged to 4.3 per cent.

These are very strong rates of jobs growth - indeed, the fastest since 2005.

Going forward, such a brisk pace is unsustainable. We expect jobs growth to moderate - at least back to 3 per cent.

Once again it was a full-time rich gain, with full-time employment up 55.1k. That is a major plus for household income growth.

Consumers clearly have the income to spend and we expect retail sales to rebound from the surprise 1.1 per cent drop in October, albeit dampened by the RBA’s November interest rate rise.

The unemployment rate dropped back to 5.2 per cent - after that rogue spike to 5.4 per cent in October. That was in line with expectations (Westpac & consensus 5.2 per cent). We expect the unemployment rate to trend lower in coming months.

The participation rate moved higher, rising to 66.1 per cent from 65.9 per cent - a fresh record high. This indicates confidence in the economy and, arguably, also the impact of stretched housing affordability.

We have taken the view that strength in the labour market is a more accurate guide to current conditions in the economy.

These figure reinforce that assessment, as did the healthy job ads for November (up 2.9 per cent). GDP growth was reportedly 2.7 per cent in the year to 2010Q3. We expect that figure to be upwardly revised.

Anthony Thompson is a senior economist at Westpac.

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