After rapid, almost unbelievable growth, in late 2015, Australian employment has slowed to a crawl this year.
In the nine jobs reports we’ve received so far from the ABS, employment growth has averaged just 5600, with that average falling to just 2600 over the past three months.
The rapid deceleration in hiring, whether due to well-known problems with the ABS’s seasonally adjusted data or “fundamental” factors, has seen year-on-year employment growth slow to just 1.4% in September, well below the giddying 2%-plus rates seen earlier this year.
All of the growth was concentrated in part-time employment, jumping 5.4% over the past 12 months compared to a decline of 0.4% in full-time workers.
And, if the Commonwealth Bank’s economics team is right, that deceleration will almost certainly speed up in the months ahead, casting even further doubt over the degree of slack that exists within the Australian labour market.
“A closer examination of the monthly changes in employment shows that annual employment growth has been propped up by two very big increases in headcount in October and November 2015,” said Gareth Aird, senior economist at the CBA.
“According to the ABS, employment lifted by 49,000 in October and 65,000 in November last year. These incredibly large monthly changes were both two standard deviation events. And they threw up concerns at the time around the reliability of the data.”
Given the enormous increases in employment seen in those months, Aird believes it has distorted the true strength in employment growth over the past year, noting that as these figures exit the data series, it will almost certainly see the annual pace of employment growth slow sharply.
“(The weakness in employment growth has) been disguised in the annual growth rates by the October and November prints last year. But that picture is going to change this month when we receive the October 2016 employment report,” he says.
“Only a big lift in employment of at least 50,000 jobs will stop annual employment growth from falling.”
Aird believes that such an outcome “looks highly unlikely”.
“We expect the annual pace of employment growth to slow from 1.4% in September to just 0.7% in November,” he says, basing the call on employment growth of 15,000 per month being seen in both October and November.
“Such an outcome should see analysts and policymakers alike focus a little more on the pace of jobs growth and what it is likely to mean for output, inflation and rates.”
Even before this expected slowdown in annual employment growth occurs, Aird notes that there’s plenty of other indicators found within the data that suggests labour market conditions are “soft”.
In just a few sentences, he lays out the troubling signs emanating from the labour market:
Employment growth has stalled and the annual pace of growth is set to slow sharply. Most of the jobs growth has been in the part time space reflecting the casualisation of the labour market. And underutilisation, due to record high underemployment, is at its highest level since 1998. In addition, growth in total hours worked is weak and average hours worked is at its lowest level on record (31.9hrs). Throw in very weak wages growth and the only indicator left to sway a “soft” picture to a “mixed” one is the unemployment rate. But the driver more recently of the falling unemployment rate has been a declining participation rate. On an unchanged participation rate the unemployment rate would have lifted over 2016.
Hardly a stellar report card, even forgiving some concerns about the reliability of the monthly ABS data.
While markets are quickly forming the view that the RBA’s five-year long easing cycle has now likely come to an end, Aird believes that the weakness in the labour market, should it persist, will likely lower the bar for further rate cuts significantly next year.
“An uncomfortably high level of activity in the housing market and the bounce in commodity prices should fend off policy easing over the near term,” he says. “But as conditions in the housing market cool, largely due to the combination of dwelling supply lifting and the stimulus of the May and August rate cuts fading, the hurdle to another rate cut will be lowered.”
Aird believes labour market conditions won’t be enough to push inflation higher due to weak wages growth, pointing to the likelihood that 1.5% will not mark the terminal level for interest rates.
“The unemployment rate may fall further, but other measures of spare capacity and labour demand suggest there will be little in the way of wage inflation to feed into consumer inflation,” says Aird.
“As such, we think 1.5% won’t be the bottom of the cash rate cycle. And we think that current market pricing, which puts the terminal rate at 1.4%, is underestimating the chance of more policy easing.”
The ABS will release Australia’s October jobs report on November 17. Arriving a day earlier, it will also release Australia’s Q3 wage price index, a report that has suddenly taken on even more significance than normal.