This index suggests Australian employment growth is about to strengthen

Photo by Bradley Kanaris/ Getty Images.

The prospects for a lift in Australian employment growth improved slightly last month, according to new research released on Tuesday.

The Westpac Jobs Index rose to 51.2 in September, up from 50.1 in August.

A reading of 50 “should” represent trend employment growth, says Westpac. So, at 51.2, it points to employment growth that is slightly higher than normal, but not by much.

Based on historic relationships, Westpac notes that the index “has to drop below 45 before it is associated with negative annual employment growth”.

The index is a combination of employment gauges found in Australian business surveys, whether from the Ai Group, the National Australia Bank’s monthly business survey, or from Westpac itself.

“To generate a broad and deep labour market indicator, Westpac compiles all the relevant indicators from these surveys into the proprietary Jobs Index,” the bank says.

According to Justin Smirk, senior economist at Westpac, the September result “suggests that following some near-term strength into year-end 2016, employment growth is set to fall back to around trend in early 2017”.

“Easing back from a recent peak of 52.3 in July, the index is now more consistent with employment growth of around 1.8% year-on-year in early 2017,” he says.

Here’s a chart showing the relationship between employment growth in the ABS’ official jobs release and Westpac’s Jobs Index:

Smirk believes that other complementary data on labour market conditions also fits with the solid reading generated from the September Jobs Index.

“The trend improvement in the Jobs Index we have seen since early 2014 has been matched by a trend improvement in the Westpac-Melbourne Institute Unemployment Expectations,” says Smirk.

“In September, the trend in unemployment expectations was just 1.4% above its long run average. The recent peak was 24.3% in May 2014.

“Remembering that falling expectations points to an improving labour market (ie lower unemployment) this is the strongest print from this series since Jun 2011 when it was –0.3%.”

While Smirk notes that “unemployment expectations tends to provide a heads up on potential turning points in the jobs index”, he acknowledges that occasionally “the Jobs Index moves first”.

“As such, the September bounce in the Jobs Index is a positive sign,” he says.

Markets will get a further indication on labour market conditions today with the Westpac-Mi consumer sentiment survey, including unemployment expectations, scheduled for release at 10.30am AEDT.

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