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Unemployment may jump a little but labour market remains solid

Monday 4th February 2019

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Economists are expecting the unemployment rate nudged a little higher in the December quarter, perhaps reaching 4.2 percent from 3.9 percent in the September quarter.

The figures, due for release on Thursday, will bounce a little because the September quarter numbers probably overstated the recent improvement, economists expect.

“The September quarter was much stronger than expected right across the board,” says Mark Lister, head of wealth research at Craigs Investment partners.

For example, the September quarter gain in employment was about double what was expected at 1.1 percent and the participation rate of 71.1 percent equalled the record high in 2017.

For the December quarter, the consensus forecast is for employment growth of 0.3 percent and for the unemployment rate to rise slightly to 4.1 percent.

ANZ Bank economist Liz Kendall puts the strength of the September quarter figures down to “some noise amidst genuine tightening in the labour market. But while the labour market is in a strong position, we may have seen the best this cycle has to offer,” she says.

The unemployment data can be volatile but “that said, we are inclined to give the data the benefit of the doubt and take a fair degree of signal from the genuine tightening of the labour market on the back of acute labour shortages and previous strength in the economy,” she says.

Employment data tends to be the last to improve in an economic cycle, or what's known as a lagging indicator.

Kendall says she's expecting that the labour market remained broadly stable in the December quarter, which would be consistent with continued GDP growth, albeit at a moderating pace, and reflecting the growth caution about hiring intentions shown in recent business confidence surveys.

She is forecasting that annual employment growth softened from 2.8 percent to 2.6 percent with employment in the quarter growing a soft 0.3 percent.

And she's predicting the participation rate remains elevated at 71 percent of the working age population.

Nevertheless, given the recent volatility, the release is surrounded by a greater-than-usual degree of uncertainty.

“We would not be surprised to see further noise, and/or revisions. Indeed, there is a real risk that we see a greater bounce in the unemployment rate than we currently expect, given the extent of last quarter's fall.”

The unemployment rate in the June quarter was 4.4 percent.

Michael Gordon, an economist at Westpac, has plumped for a slightly higher 4.2 percent unemployment rate forecast.

“A range of measures are pointing to a tightening labour market. However, the sharp fall in the unemployment rate last quarter may have overstated the case,” Gordon says.

But even if his forecast proves correct, that's still consistent with an underlying improvement.

The low September print was dominated by an unprecedented drop in youth unemployment. “In our view, the narrowness of that result makes it more vulnerable to a reversal.”

Still, he notes the small drop in unemployment for older workers suggests that at least the direction of the move was genuine.

“Even if the unemployment rate nudges above 4 percent again, it would still imply a tight labour market by historic standards.

Gordon is also forecasting a 0.7 percent increase in private sector average hourly earnings for the quarter, taking the annual increase to 3.4 percent, and a 0.5 percent increase in the Labour Cost Index for the quarter and a 2 percent annual rise.

“With workers increasingly hard to find, we expect a gradual pick-up in wage growth in the coming years, although the quarterly result itself may not be all that revealing,” he says.

There has been little pickup in wage growth to date outside of government-mandated increases such as fair pay agreements and minimum wage hikes, Gordon notes.

(BusinessDesk)

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