Actions speak louder than words.
Even though the release of the minutes from the May RBA board meeting show that the decision to drop the cash rate in Australia to a fresh modern day low of 1.75% was made, with some trepidation, on the back of RBA staffers’ downgraded forecasts of inflation, a new indicator from the ANZ’s economics team suggests the slowdown in the labour force might be equally as important.
In a note to clients ANZ economist, and former Barclays chief economist for Australia, Kieran Davies, said the ANZ has “developed a Fed-style labour market index which distils the common factor from a large range of official and private sector labour market indicators”.
Those indicators include measures of wages, unemployment rate, total employment, participation rate, hours worked, job flow, business survey measures of employment and consumer unemployment expectations.
These measures combine into the ANZ’s new measure of labour market conditions.
Because it is broader, and perhaps conveys more information the new index, Davies says, has a better predictive power than the outright level of unemployment in the economy.
Davies says that the RBA seems “more responsive to the broad sweep of labour market conditions”, which when tied to the latest minutes reflection that “employment growth had slowed in the first quarter of 2016”, suggest that concerns about the labour market and wages were a big factor in both the RBA cut and the downgrading of the outlook that facilitated this month’s cut.
But in keeping with the markets’ thinking post-RBA minutes, Davies says the the signal from the ANZ’s labour market conditions index “currently points to a broadly stable cash rate” in Australia.