Labour market improving in the near term: Justin Smirk
GUEST OBSERVER
In the second half of 2016 employment growth significantly overshot our preferred leading indicators.
So we were not surprised, in fact we had been expecting such a shift, that in the first three months of 2016 (slide 5), the ABS reported total employment rising an average of just 5.6k per month taking the annual pace down to around 2 percent yr from the Nov 2015 peak of 3.0 percent yr.
From a significant outperformance compared in our preferred near-term employment indicator, the Westpac Jobs Index (slide 6), employment growth quickly fell to be more in line with it.
The June Labour Force Survey continued this softer 'trend' with a 7.9k rise in total employment. Westpac was forecasting +10k while the market was expecting +12k. Total employment has lifted 225.0k in the year (or 1.9%yr) and while full-time employment bounced back in the month (+38.4k) and part-time fell 30.6k, annual growth in part-time employment continues to outpace full-time employment (134.4k/3.7 percent yr vs. 90.6k/1.1 percent yr).
We believe that the shift to part-time employment is likely to be more about the sectors are expanding and contracting rather than any significant change to employment arrangements. It is a similar situation for employment by gender with female employment rising 136.2k in the year (2.5 percent yr) compared to the 88.8k (1.4 percentyr) rise in male employment.
It is possible that uncertainty around the Federal election may have held back the employment gains in July.
In addition, the ABS notes that the July outgoing rotational group for the sample has a higher than average attachment to the labour force. If the in group rolling is more average, this could lead to a softer employment print but not necessarily a higher unemployment rate.
So it may be tempting to forecast a soft employment gain, our Jobs Index continues to strengthen suggesting we are in store for a pick-up in employment. Westpac’s July forecast for +25k total employment has the annual rate easing back a touch to 1.8%yr. However, this is more about base effect than the start of a meaningfully softer trend. The participation rate rose 0.1ppt in May to 64.9. Westpac is forecasting the participation to be flat in June (slide 7).
Participation did rise through 2015, due in a large part, to rising participation in NSW and, in particular, by females. We have seen a very modest moderation so far in 2016 and the big question for 2016 is can NSW hold this overall higher rate of participation as males participation in that state continues to trend lower? (slide 8).
Our July forecast for flat participation combined with a solid employment number should be enough to hold the unemployment rate at 5.8%. (slide 9)
The March and April Labour Force Surveys revealed a cautionary sign in a sudden decline in hours worked but so far, this has not turned into similar downturn in employment (slide 10).
While hours worked per person, particularly for full-time employees, has weakened in the last year it does appear that the worst as the slide in hours worked has not led a correction in employment. (slide 11).
The ABS publishes their own measure of unemployment expectations and this lifted through Q1 which was a worry as this can point to a possible rise in unemployment (slide 12).
However, the Q2 update reveals this as a temporary blip just as the Westpac–Melbourne Institute Unemployment Expectations Index suggested it would be (slide 13).
The Westpac–MI Index is pointing to the labour market improving in the near term at least in regards to the unemployment rate (slide 14).
The Westpac–MI is also useful for gauging how much hours worked may be over/under shooting relative to expectations and thus point to turning points in hours worked momentum. (slide 15) (slide 16).
Outside of NSW it seems we have passed an inflection point for growth in hours worked.
Justin Smirk is senior economist, Westpac Group and can be contacted here.
