Insights from Credit suisse
Full-time employment trending lower, with NSW leading the downturn
Low quality employment beat. Headline employment came in above expectations, rising by 13.5K in January. The unemployment rate fell slightly to 5.7%. However, full-time employment fell sharply by 44.8K, causing the six-month trend to turn negative. Also, the decline in the unemployment rate was largely due to a decline in labour force participation.
■ NSW looks very weak, with negative sample rotation biases to come. In contrast to the national picture, aggregate hours worked in NSW continued to fall. Year-ended growth has now fallen to -1.5%, historically consistent with stagnation in the economy. This concerns us, because NSW households are highly geared, and are vulnerable to weakening labour market conditions. Also, we note that large upward sample rotation biases from previous months have not yet washed out of the data.
■ Still looking for more easing, but the RBA needs to first test its global reflation thesis. In our view, there is ample and growing slack in the economy consistent with disinflation and lower rates. But the RBA has made it clear that the threshold for rate cuts is very high, especially now that the bond market is pricing in global reflation.
Labour market review
A low quality employment beat
Headlines from the January labour market report were generally positive. Employment came in above expectations, rising by 13.5K, with moderate upward revisions to prior months’ data. Also, the unemployment rate unexpectedly fell to 5.7% from 5.8%, largely
reflecting a decline in the labour force participation rate (i.e., people dropping out of the workforce).
Compositionally though, the result was poor. We note that full-time employment fell by 44.8K over the month, while part-time employment rose by 58.3K. Looking back over the prior six months, full-time employment has actually fallen by 19.1K. It was not so long ago, that many commentators were applauding three consecutive months of full-time employment growth. Thanks to the outsized weakness in January, the trend is now negative, rather than positive.
Labour market outcomes diverge across states
Aggregate hours worked rose by 0.6% in January, taking year-ended growth higher to 1.2% from 0.8%. However, the nation-wide result masks considerable dispersion among states. In NSW, hours worked continued to fall. They declined by 0.6% over the month,
taking year-ended growth lower to -1.5% from -0.7%. But in all other states, hours worked seem to be increasing.
We are concerned with the weakening trend in NSW, because:
1. Our proprietary leading indicator of activity (based on retail sales, consumer sentiment, home-buying sentiment, loan approvals, building approvals and the nonresidential construction pipeline) has been pointing to stagnation in the economy for some time. Weakness in housing-related sectors is not being offset by a ramp-up in infrastructure spending.
2. Hours worked and state final demand growth are highly positively correlated. Weakness in hours worked is historically consistent with stagnation in the economy.
3. NSW households are highly leveraged, and the housing market is vulnerable to weakening labour market conditions.
Still looking for weaker labour market outcomes
Going forward, we expect jobs growth to slow. Our proprietary employment leading indicator, based on NAB business confidence, Westpac consumer sentiment, and loan approvals points to only moderate growth in hours worked over the next few months. In context, the recent bounce in hours worked seems to be occurring ahead of schedule, and may not be sustained. We also believe that our leading indicator may be overstating future jobs growth to the extent that the January NAB business survey was upwardly-biased by inadequate seasonal adjustment factors.
Technical factors are also likely to weigh on the outlook. We note the ABS’ comment that sample rotation did not materially affect the full-time employment data in January, because the incoming sample had the same full-time employment to population ratio as the
outgoing sample. For the first time in a long time, the monthly full-time employment change appears to reflect underlying developments in the economy, rather than technical distortions. The problem for us is that full-time employment fell sharply over the month, even though there was no downward sample rotation bias. Indeed, the large upward biases to the data in November and December do not appear to have yet washed out, with the ABS hinting that they may start to do so in the coming months. If this is the case, we should expect to see more weakness in full-time employment.Policy implications
Our proprietary measure of the output gap based on full-time equivalent employment (as a share of the active population), and NAB survey capacity utilization remains very wide. The gap is historically consistent with disinflation. Indeed, our RBA cash rate model, based on the output gap, and our estimate of the long-term neutral rate of interest continues to point to more policy easing (specifically, more than one rate cut). The case for easing would be even stronger, but for the unusually large improvement in NAB business confidence in January.
That said, the RBA does not appear very willing to cut rates anytime soon. Governor Lowe has made it very clear in recent times that the threshold for rate cuts is very high, especially given how the bond market continues to price in the global reflation story.
Domestic economic data almost seems irrelevant in this context, unless it comes in extraordinarily weak.
In our view, the bond market is pricing in an average of two binary outcomes, resulting in a flat, but unlikely profile for the cash rate. One possible outcome is that US President Trump succeeds in reflating the economy with his fiscal package, with positive implications
for commodity prices, and the Australian mining capex cycle. The RBA might consider rate hikes in this scenario. The other possible outcome is that Trump’s stimulus plans fail, or that asset price bubbles burst, triggering widespread deflation, and rotation back into safe haven assets. The RBA might consider easing in this environment.
There is obviously considerable uncertainty on this matter. But we are concerned about what the global reflation story might look like domestically in the event that the NSW economy weakens. The outlook for mining states might look healthier on the back of higher commodity prices – but we hardly expect them to boom like they did a few years ago, because it will take a long time for the mining capex cycle to recover (let alone bottom). The risk is that any recovery we get in mining states is not strong enough to offset
weakness in the NSW economy, making re-balancing of growth across states a very risky proposition.
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