Here's what economists are saying about Australia's jobs report

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Australia’s jobs report smashed expectations yet again in May, recording an enormous increase in employment for a third consecutive month.

And that’s just the tip of the iceberg in terms of strength from the report.

Have a look at a few of the statistics below demonstrating just how quickly, and somewhat surprisingly, labour market conditions have improved.

  • Unemployment tumbled to 5.5%, leaving it at the lowest level since February 2013.
  • Over the past three months employment has increased by 141,100, the fastest increase in any quarter since November 2004.
  • Employment growth is now averaging a breakneck 30,700 per month so far in 2017, with the vast majority of those full-time workers
  • Total hours worked surged by 31.1 million hours, up 1.87% on a month earlier.
  • Labour market participation lifted to 64.9%, the highest level in 10 months.

Quite the honour board, right? It’s an unbelievably strong turnaround from what was seen only a few months ago.

Employment is booming, leading more people to enter the labour market. And with hiring levels surging, it’s seen the unemployment rate tumble to a more than four-year low.

Based on what’s been seen recently, existing slack within the labour market will be eaten up quickly, potentially laying the foundation for a pick-up in wage growth, inflationary pressures, increased consumption and economic growth.

And potentially higher interest rates. Gulp.

However, this is the ABS, and we all know its seasonally adjusted figures can be volatile at the best of times, an outcome that has immediately created a debate as to whether the data can be believed.

It’s unfortunate scenario, but that’s just the way it is.

With employment growing at the fastest pace in over a decade in the past three months, even surpassing the enormous gains reported in late 2015 that were widely criticised for overstating the likely pace of hiring during that period, it’s little wonder a few think that today’s data is a little too good to be true.

However, other labour market data such as job ads, vacancies, PMI reports and employment gauges from Westpac and the NAB has also been strengthening recently, suggesting that perhaps the data is not all that far from the truth.

That is only adding to the debate.

Now that Australia’s economic community has had its chance to digest the data, and assess whether it reflects reality or not, it’s time to see what they’ve made of the report.

Is it ridgy-didge, or a rort?

Let’s start with Tapas Strickland of the National Australia Bank. We’ve highlighted an important factor he picked up in the data.

Tapas Strickland, NAB

Driving employment this month was an increase in the participation rate, with the participation rate up 0.1% point to 64.9%. Despite that, the unemployment rate fell a full 0.2 percentage points to 5.5% and is now at its lowest level since February 2013. It is likely the unemployment rate will track lower given trend employment growth is above the breakeven level of 14,000 needed to keep the unemployment rate from rising.

Two soft points in today’s otherwise stellar release were underemployment and some hint that sampling may be behind some of the improvement in the month. Underemployment remains close to cycle highs at 8.8% and our research indicates inroads into this will need to be made before wages start to lift. Sample volatility continues with the ABS original data indicating 82% of employment gains came from changes to the sample; this could represent genuine improvement, but it also suggests some statistical payback is likely next month.

Nevertheless, today’s strong numbers vindicate the market and RBA’s confidence in trusting leading indicators of employment growth with official employment figures having played catch up over the past three months. Leading indicators point to further improvement in the months ahead.

David Gradwell, ANZ

Australia’s labour market posted another strong result in May, building on the positive outcomes in the previous two months. Employment now sits 2% higher than a year ago, and has certainly started to catch up to a number of other indicators. Business conditions, profitability, capacity utilisation, and job advertisements have all been trending higher or sitting at elevated levels, and are now feeding through to actual job creation.

While the increase in employment was stronger than both the market and ANZ expectations, it does not look out of line with the improvement in the aforementioned indicators. We continue to believe that employment will rise from here, although the recent rapid growth is less likely to be sustained.

Tom Kennedy, JP Morgan

Having disappointed for most of 2016, full-time jobs growth has kicked up a gear in 1H17 and in net terms is up 100,000 since January. Hours worked were also decent, buoyed by the strong employment print.

Despite the nascent recovery in full-time jobs growth, the underemployment rate remains elevated and close to all-time highs at 8.8%. Growth has been consistently sub-trend, so this mix suggests that firms are still managing capacity through adjusting the number of hours worked, rather than altering headcount. While such dynamics will not show up in the jobless rate and may in fact bias it lower, weak wage growth has empirically been better explained by underemployment in recent years, and the services-skew of output should see elevated underemployment persist.

Given slack in the labour data is likely greater than the jobless rate would suggest, we still characterize today’s print as consistent with the view that the RBA has more work to do, though easing may take longer to eventuate than initially anticipated given the chronic, rather than acute, nature of the weakness.

Kristina Clifton, CBA

The pace of employment growth has clearly accelerated, with jobs growth averaging 47,000 per month over the past three months. This is well above the 20k needed to accommodate the growing population.

Indicators of the labour market have all moved in the right direction. While there has been some doubts about the accuracy of the ABS employment data in recent months we think that the fact that we have had three very solid outcomes is a good sign that conditions have firmed.

In addition, the leading indicators of jobs growth are positive. Vacancies have trended higher and the employment conditions component of the NAB survey is pointing to continued solid jobs growth.

We have said for a while now that it would take a deterioration in labour market conditions or a significant cooling in housing market conditions for the RBA to entertain the thought of another rate cut. The recent run of employment data takes thoughts of a rate cut off the table for now. We think rates will remain on hold on for the rest of this year and into next.

Shane Oliver, AMP Capital

The third month in a row of very strong jobs growth may reflect sample rotation issues, which have been a regular cause of consternation with the labour market statistics. And the jobs data does have a tendency to run hot and cold so we are now due for a weak patch. But the May jobs data also brings the annual rate of jobs growth more into line with leading indicators of jobs growth, which continue to point to solid jobs growth ahead albeit they have exaggerated actual jobs growth since 2014.

Whatever it is, strong jobs growth provides welcome news after a run of soft data for GDP growth, consumer confidence, retail sales and housing related indicators. The only problem of course is that underemployment remains very high at 8.8% leaving labour underutilisation high at 14.4%, albeit down from a recent high of 14.8% in February and this will act as an ongoing constraint on both wages growth and consumer spending.

The RBA no doubt breathed a sigh of relief with today’s jobs data showing unemployment falling to its lowest since early 2013. This will support the RBA in leaving interest rates on hold for now. Nevertheless with numerous other indicators remaining on the soft side – including overall economic growth, consumer spending, non-mining investment, indicators for housing construction and wages growth – our view remains that there is far more risk of another rate cut than a rate hike in the next 12 months. But to see a cut we will likely need to see a faltering in the jobs data.

Michael Turner, RBC Capital Markets

Labour force reports tend to contain a high noise factor, but there is little point in denying the solid trend of the past three months. This purple patch of employment growth is given a little more credence by the alignment of some improving leading indicators, including job vacancies and surveyed expectations of headcount within firms.

The quarterly underutilisation data still suggest an above-average level of spare capacity within the labour market, despite the unemployment sitting not far above typical estimates of the NAIRU (5-5.25%).

Looking ahead, most leading indicators suggest modest employment growth, albeit at a slightly slower pace than the last few months. This seems likely to result in the unemployment rate settling in a 5.5-5.75% range instead of 5.75-6%, with faster population/labour force growth in recent months making it difficult to see a move lower than this on a sustained basis.

For the RBA, the dovish parts of its more recent communication have tended to be around the labour market. Now with a few solid employment reports in hand and some positive leading indicators, it will likely express a more comfortable view on the labour market. This in turn will likely put a neutral stance on a more confident footing, particularly given that there are few signs of a noticeably slower housing market yet.

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