A miracle has been occurring in the Australian economy and it’s not the 25 years without a recession.
Rather it’s the amazing, some say improbable, strength in the Australian jobs market which created 301,000 jobs in 2015 including 129,000 in the final three months of the year.
But that is about to change, according to some of the Australian economy’s best long-term indicators of job creation.
Take this week’s release of the NAB’s monthly Business Survey as an example.
While the focus each month is on the level of business confidence and conditions, +2 and +5 respectively this month, the real power of the index is in the sub-indexes – one of which is employment.
The employment index has a long and close correlation with employment outcomes. The NAB puts it this way:
“The NAB employment index has a strong statistical relationship with ABS employment data going back to the late 1980s and appears to lead annual employment growth by around 6 months.”
But this correlation broke down in 2016 with the index suggesting 170,000 jobs should have been created against the 300,000 that the ABS reported in its December jobs report last month.
In the information pack accompanying the release of the business survey the NAB did highlight the clear risks in the employment index at a sectoral/industry level (our emphasis):
Employment conditions in the NAB survey eased back into negative territory in January, to be at just -1 index points – below the average of the series since 1997. Disappointingly, less than half of the industries in the Survey are experiencing trend employment conditions above zero, with some of the previous outperformers starting to demonstrate a clear downward trend – although many of the underperforming industries are demonstrating an upward trend (despite being in negative territory).
That suggest that the NAB’s estimate that employment growth will average 14,000 per month in the six months ahead and the bank’s expectation that an unemployment rate of 5.6% by the end of 2016 won’t necessarily be in a straight line.
That is particularly the case given the well-publicised sampling problems the Australian Bureau of Statistics is experiencing with the labour force survey at the moment. As a result, there is a risk that there is some give back of the recent strong gains, Tim Toohey, Goldman Sachs’ chief economist for Australia, told an audience at the firm’s Australia and New Zealand Macro Conference last week.
The latest release of the ANZ Job Ads series suggests a slow down in employment growth to 1% per annum.
ANZ economist Justin Fabo added to the mix, tweeting that corporate profitability also suggested slow jobs growth.
— Justin Fabo (@justinfabo) February 9, 2016
Clearly there are risk on the horizon, statistically from ABS sample rotation, mean reversion within the overall NAB employment index, and headwinds from profitability.
But there is also another risk – a big one.
In the current environment, will employers take on new staff, even make replacements, unless they really have to? The answer is clearly no.
But if employment does stay strong we’ll know that the Australia economy really is a miracle and Glenn Stevens and his colleagues at the RBA are the wizards of Oz.
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