WEEKEND ECONOMIST: Labouring for a rate cut

With the recent release of soft Australian labour data, an expected total 100bps of rate cuts by the RBA would see more even economic growth and a boost to the labour market in 2012.

On Thursday, just one day after the solid but somewhat dated September quarter National Accounts, we received a more timely update on the Australian labour market that painted a more sober picture of domestic economic conditions, with data for the month of November. The labour force release was soft. Jobs were lost during the month of November and the unemployment rate increased to 5.3 per cent, up from 5.2 per cent. For the Reserve Bank these trends will reinforce downside risks to growth and inflation pressures for 2012.

On July 15th, we forecast the unemployment rate to rise to around 5.75 per cent. At the time, the unemployment rate was 4.9 per cent for the month of June. We assess that while the mining construction boom is set to continue, conditions elsewhere moderated during 2011, and it is the non-mining economy which generates the vast bulk of total employment. Developments globally and domestically continue to point towards a further modest rise in unemployment. Accordingly, we continue to expect the unemployment rate to peak at around 5.75 per cent.

The RBA has the policy flexibility to respond to labour market softening. The Bank has lowered the cash rate by 0.50 per cent so far, down to 4.25 per cent. We continue to expect a total of 100bps of rate cuts. This recalibration of interest rate settings will provide a boost to conditions in the broader economy. This should see a more even economic expansion emerge during 2012, such that the labour market improves later in the year and the unemployment rate begins to stabilise at a peak similar to that in 2009.

November labour force, the detail

Total employment declined by 6,300 in November. This was a weaker than expected monthly print. Both the market and Westpac were looking for a 10,000 gain. Over the last three months, total employment has grown at an average of just 9,600 per month.

November also revealed a reversal of the improvement in the composition of employment that we had been observing over the previous two months. Full-time employment fell 39,900, for an average loss of 1,400 full-time jobs per month over the last three months, to be down 0.2 per cent through the year. Part-time employment rose 33,600 for an average gain of 11,300 per month over the last three months to be up a modest 1.6 per cent through the year.

Male employment rose 2,300 in November while female employment fell 8,600. However, this was not enough to change the picture of gender differentiated labour market conditions. So far this year, the Australian economy has shed 12,100 male jobs while female employment has risen a total of 56,800. The point to note here is that both full-time and male employment are typically seen as key drivers of cyclical swings.

The state picture continues to show more of "patchwork" than "two speed" features. Total employment in New South Wales was broadly flat, while the jobs market in Victoria has started to soften (a three-month average decline of 1,500 per month). WA is still the mining powerhouse, with a three-month average of plus 3,100 per month, while Qld is disappointing with an average of minus 4,000 jobs per month over the last three months. The unemployment rate in Queensland also lifted to 5.8 per cent in November (from 5.7 per cent), while in Victoria it rose to 5.5 per cent (from 5.4 per cent). New South Wale's unemployment rate edged lower to 5.2 per cent (from 5.3 per cent).

Comments

The various models we run based on the leading indicators of the labour market (including job ads, the various business surveys and activity data) suggests that total employment should be growing at an average of between 10,000 and 20,000 per month. The 6,300 fall in employment in November means we have now seen an average gain of just 9,600 per month for the last three months and an average of just 5,000 per month for the last six. So while September and October did provide two robust positive reads, November confirms an overall weaker trend, which is at the very low end of the range suggested by the leading indicators.

There have been some analysts who have been pointing to the more robust hours worked numbers to suggest that the labour market is not as soft as the total employment figures suggest. And certainly the current downturn in the labour market has so far shown growth in hours worked holding up better, relative to jobs growth. In previous cycles, hours worked fell faster and deeper. However, the last few months suggest we may be starting to see a bigger down leg in hours worked. They have fallen 0.5 per cent over the last three months, compared to the modest 0.3 per cent rise in jobs.

We may be starting to see a leg down in hours worked as firms strive to lift productivity. In the September quarter National Accounts, hours worked in the market sector rose 0.2 per cent for the quarter compared to a 0.9 per cent lift for the quarter in market sector output. We also think that sectoral factors, such as the mining sector starting to move from an investment phase to a production phase, may also be helping to lift output by a far greater amount than hours worked. As such, we may see a larger fall in hours worked over the next six months than our forecast for a modest decline in total employment.

The last two months we have seen a pickup in the ABS estimate of population growth, suggesting we have passed the nadir in the population cycle. Nevertheless, with the working age population growing just 0.11 per cent for the month (it peaked at 0.24 per cent for the month in Jan 2010), the fall in the participation rate from 65.57 per cent to 65.51 per cent was enough to hold the growth in the labour force down to just 3,100.

If the participation rate is flat from here, the labour force will grow at around 14,000 per month. While we do expect the participation rate to moderate a little going forward, we are also looking for jobs losses over the next six months. This will be enough to lift the unemployment rate to around 5.75 per cent by mid 2012.

Justin Smirk is a Westpac senior economist.