It looks like Australia's jobs market is strengthening, and household spending could be next

MARIE HIPPENMEYER / AFP / Getty Images

Australia’s labour market strengthened in early 2017, according to official statistics released by the ABS.

Employment growth is lifting after a sharp pullback in 2016 and the unemployment rate — while volatile — also appears to be edging lower.

It’s got many wondering if this is a sign that elevated business conditions and confidence are now being reflected in demand for labour, particularly given it’s a lagging economic indicator.

The good news is that it’s not just the ABS reporting stronger labour market conditions.

ANZ’s job ads series has been strengthening, and now the National Australia Bank’s (NAB) employment subindex in its monthly Australian business survey is also following suit.

According to the NAB’s latest survey for May, the employment subindex printed at +6, fractionally below the +7 level previously reported in April.

While a small pullback, the NAB says it points to “a healthy rate of job creation in the economy”.

“That is consistent with the recent lift in employment growth according to ABS data and suggests the strength is likely to continue in coming months,” it says.

“This outcome points to an annual job creation rate of around 230,000 — or around 19,000 per month — which is sufficient to see the unemployment rate push lower should labour market participation remain unchanged.”

Source: NAB

That’s a promising sign that recent strength in the official ABS data is not an anomaly caused by well-known volatility in its seasonally adjusted data, but rather the start of an improving trend.

Recent growth in job advertisements also helps to solidify this view.

While hiring looks set to accelerate in the coming months based off the NAB’s analysis, the question remains as to what types of jobs will be created, and what will it mean for the outlook for wage growth.

On those front, the NAB had mixed news for workers.

“Changes in employment conditions varied across industries in May,” it said. “There was a particularly large decline in wholesale, which was followed by construction. In contrast, manufacturing had the biggest increase.”

Somewhat surprisingly, it also found that Australia’s mining sector now has the best employment conditions of all sectors monitored, at least in trend terms, at +13 points, outdoing personal services at +11 points.

And aside from the transport sector at -4 points, the survey also found that employment conditions were positive across all other sectors, including retailers.

Source: NAB

However, while a promising sign that labour market conditions are strengthening across most sectors, there’s still little evidence that wage pressures are following suit.

“Labour cost inflation remains modest, but has been trending slightly higher,” the NAB said, adding that growth in labour costs was steady at a quarterly rate of 1% in May.

While questions remain as to the quality of jobs that may be created, presuming that they will, the lift in the NAB employment index is an encouraging sign on the outlook for Australia’s household sector.

According to research conducted by ANZ last month, it’s the view communicated by Australian businesses, rather than households, that tends to provide a better guide on the outlook for economic activity.

“We think the usual dominance of business conditions over consumer confidence reflects the link between business conditions and the labour market,” it said. “If businesses are in an optimistic mood then that usually flows through to the labour market, which in turn will likely boost consumer sentiment if it is low.”

The linkage between the two is easy enough to understand.

Businesses can gauge demand, and, if it’s strengthening, they have tendency to add more staff. That, in turn, improves labour market conditions, making households feel a little more confident when it comes to job security or finding new work, potentially helping to boost household sentiment and spending as a consequence.

There’s tentative evidence emerging to suggest that’s happening now, with businesses conveying a far rosier picture on the health of the Australian economy than households.

According to Alan Oster, chief economist at the NAB, how the disparity between business and household confidence evolves will be critical to the outlook for economic growth.

While it’s only early days, the improvement in business conditions and confidence, and more recently labour market indicators, is a promising sign that recent weakness in the household sector many not become entrenched.

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