Sydney - Thursday - July 10: (RWE Aust Business News) - The rise in employment was nearly triple market expectations in June, points out J.P Morgan Securities economist Helen Kevans. Employment rose by 29,800 (JPMorgan 0, consensus +10,000), following a revised fall of 25,600 in May (previously -19,700). The employment growth was driven by the creation of 25,000 full-time jobs; part-time jobs increased by 5,800. The participation rate rose from 65.2% to 65.3%, and the unemployment rate fell to 4.2% from 4.3%. Looking through the recent noise in the employment series, over the past two months, only 4,200 jobs have been added to the economy. This represents a marked slowdown in the rate of employment growth, Kevans suggests. Furthermore, a key feature of the stronger than expected June labour data was a sharp fall in the unemployment rate in Western Australia (WA), which fell from 3.7% in May to 3.2%; this fall is likely to reversed next month given the jobs expected to be lost in mining and related companies from the WA gas explosion.
The string of recent soft domestic data suggests that job growth will slow even further. In particular, business confidence was very weak in the first half of the year, meaning that firms have probably reined in, or postponed, their hiring intentions. The RBA last week highlighted that there have been tentative signs of easing in the labour market. Already, there has been material deterioration in the ANZ job ads series, and in the employment measure of the NAB business survey. The economy has added 20,000 jobs on average each month since the start of last year, although this rate of growth will probably not be sustained throughout 2008.
That said, the economy has added 250,000 jobs since mid-2007 and the unemployment rate remains at a three-decade low, meaning that there remains upside pressure of wages, especially given widespread skill shortages. Wage growth has so far remained contained, but the risk is skewed to the upside. Not only have labour market conditions remained tight for an extended period, but the industrial disputation underway in some industries—including transport, education, law, and medicine—may result in wage rises to compensate for high and rising food and energy prices. Furthermore, persistently elevated inflation may soon begin to affect wage and price setting behaviour. Data this morning showed inflation expectations running at 5.9%, the highest level ever.
Unfortunately, the employment data is going to become even more volatile going forward. The ABS has announced that the sample sizes for the labour force survey will be slashed by 24% in July owing to budget cuts, which will increase the volatility of the series. "There will be increased volatility in the estimates, particularly the original and seasonally adjusted estimates, but the volatility will be random," according to the ABS. This comes on top of an 11% reduction in the sample size that has been implemented since last November. The changes to the survey will make it increasingly difficult to estimate the employment numbers going forward. With respect to monetary policy, building evidence suggests that the RBA is seeing signs of the significant easing in domestic demand that officials say is needed to curb inflation, notwithstanding today’s unexpected bounce in job growth, which is unlikely to be sustained. JPMorgan maintains the view that the RBA will leave interest rates steady for the remainder of the year. If the easing in domestic demand is sustained, RBA officials will look through the elevated inflation readings in coming quarters. Headline CPI (at 4.2% in 1Q) is running well above the RBA’s 2-3% target range, and will likely remain above target for an extended period.
