Almost out of the blue, Australia’s jobs market is looking alright.
And now there’s another indicator that labour market conditions are starting to brighten.
Westpac’s Jobs Index — an aggregate measure of various labour market indicators — hit the highest level since May 2008 in January, which makes it the strongest reading since before the global financial crisis.
This chart from Westpac plots its Jobs Index — shown in grey — against annual Australia employment growth in percentage terms in red.
A reading of 50 for the former is indicative of trend employment growth, essentially the average in the past.
According to Justin Smirk, senior economist at Westpac, at 52.3, the current level of the index is normally associated with employment growth of around 2% per annum, well above the 0.8% annual growth reported in the ABS’ December jobs survey.
While this suggests there’s not a great relationship between the two, and that you should not get too excited about the surge in the Westpac index, Smirk says there’s a good reason why the two have diverged over the past year.
“From September 2015 to November 2015 the pace of employment growth accelerated to 3% per year while the jobs index suggested that employment growth should be closer to 1.75% per year,” he says.
“At the time we argued that such surges (and following ebbs) in employment are not unusual and so thought that employment growth was set to fall back towards the Index (and below) sometime in the first half of 2016.”
Put another way, the ABS data likely overstated job growth in 2015 so the deceleration in 2016 was largely due to the high benchmark established the year before.
It’s unlikely that few will go into bat for the ABS’ seasonally adjusted jobs figures given the wild monthly fluctuations in recent years.
So, putting aside the ABS’ seasonally adjusted data, there is reason for optimism about the sharp improvement in the Westpac index.
Smirk certainly thinks so, forecasting a 20,000 increase in employment in January when the ABS report is released tomorrow, which would see the unemployment rate dip down to 5.7% should participation hold steady.
“This will lift the pace of employment growth to around 1.0% per year, still well under our index of around 2% per year but a meaningful recovery none the less.”
He also suggests that there may be upside risks for his forecast, noting that much will depend upon the survey’s incoming rotation group.
“The ABS noted that the sample group rolling out of the January survey has a lower unemployment and participation rates than the survey average,” he says.
“Much will depend on what the sample that rolls in is like but just taken on face value this observation suggests upside risks to unemployment rate if the sample that rolls in has participation and unemployment rates more like the sample average.”
The ABS labour force survey comprises eight individual groups. After a group has participated for eight months, they are removed from the survey and replaced by a new group who often have differing labour market characteristics to their predecessors.