Yesterday’s employment data to my mind was more than simply noise, regardless of what the punditry is saying.
Houses and Holes used a couple of my charts in his post yesterday and the first one showed the trend in month on month employment growth and it is clear that it has been in a down trend for many months.
Now I know that employment is a volatile beast and that the punditary usually has a forecast (around 20k) which is lower than the standard deviation of the employment series of approximately 27k but, beside begging the question as to why they bother to forecast it (without a disclaimer as to accuracy) this is not the convenient excuse they make it for.
Lets look at the first chart. This is my personal favourite for the employment market although its not very good for month on month forecasting it does show a trend and strong correlation between the NAB Employment index and employment growth.
So if we look at the outlook for employment from the NAB business survey and shift employment outcomes in 6 months it still suggests that employment growth is set to slow a little further over the coming months before stabilizing, all other things being equal.
This chart has been driving my expectations for employment for many months now and while I’m certainly at the outer edge of consensus it seems this correlation remains both robust and prescient. And makes the noise claims laughable…looks more like the trend.
I want to look at the relationship between employment and RBA rates but in building the picture for a potential deterioration in employment, or at the very least an absence of the strength the market is expecting. I refer you to a very good piece in the context of this debate about “noise” in employment data by Unconventional Economist recently where he looked at the relationship between unemployment and house prices. Leith found that:
…declines in home values began 6 to 9 months prior to unemployment rising
Which of itself is a worry but all the more magnified by the RBA’s seeming obvious intention to raise interest rates again soon.
Which brings me to the nub of the point, the RBA may have already done enough to knock employment lower.
Now it is clear that monetary policy is aimed at restraining aggegate demand such as to put people and businesses out to pasture to either reign in inflation, make room for the other parts of the economy which are growing strongly or some combination of both. This has to ultimately show up in increased job losses and rising unemployment.
So in an economy that is already showing acute signs of household restraint the following charts will likely give you room for pause and wonder just how much more RBA action is necessary.
Looking at the relationship between the cash rate and the pace of employment growth, both for total growth and full time employment growth, it appears that the current setting of monetary policy is having its desired effect:
What the latest employment does is remove the impetus for a June hike. It also suggest that there is more weakness in the employment market that many are yet to acknowledge. This data and the current state of the household sector go hand in hand. The question is how much pain is the RBA prepared to deliver in the consumer economy for the mining boom?