The July labour market report makes me feel much more comfortable with the RBA’s decision to hold policy steady at 4.75% in August. As is usually the case, the Bank (thanks to it’s excellent liaison program) has a better feel for what was going on than is possible given only ABS data.
The first thing to note is that the higher unemployment rate (+20bps to 5.1%) means that there are less worries about medium term inflation risks – the RBA has always had trouble with inflation when the unemployment rate is below 5%, so for inflation targeting folks an unemployment rate that is above 5% is welcome.
The sunny spin on the July report is that the higher unemployment rate may be all seasonal. In a typical July, folks go on holidays, and so the ranks of the unemployed tend to decline (as folks do not look for work). The number of employed tends to be about steady.
In the July 2011 estimate we find that jobs were +0.4k which after seasonal adjustment becomes -0.1k (to 11450.5k). In line with the seasonal pattern, the ranks of the unemployed declined, however this year the drop was only -3.2k. This is a smaller than usual drop, so the seasonally adjusted estimate of the number of unemployed rose 18k.
And that, folks, is how we got the higher unemployment rate.
If you want to put lip-stick on this pig, you might argue that our cautious consumers don’t holiday so much anymore, and as such they keep looking for work.
The detail of the report, however, suggests to me that something more sinister may be developing.
I only really rate three estimates from the jobs report – the unemployment rate, the hazard rate, and the entry rate. These are well measured, and all three were bad.
The first, we have covered. There is a seasonal excuse for the recent spike, however the trend has turned up – and that is the best estimated bit.
The second is the hazard rate, or the probability that someone who is employed will lose their job. We can estimate this directly from the gross flows data (though the ratio does need to be seasonally adjusted). Doing so, I find that the probability that someone who has a job loses it (and is unable to find another before the next sample) rose 60bps to 3.6%
The third is the entry rate, or the probability that someone who is unemployed will be able to find a job. This fell 1.6ppts to 19.6%, and is now around the rates seen in early 2009.
There is a lot of noise in even these estimates, however we have three from three of the better measured labour market measures saying things turned down in July.
In addition, leading indicators such as job ads and the NAB Business survey’s employment intentions index are falling, and NAB capacity utilization also declined sharply in July.
My guess is that all these measures will get worse again in August, as the panic of the recent equity crash saps confidence and slows hiring (firms must hire every month to maintain employment, as about 3% of jobs turn over each month regardless of the economic situation).
A few more months like this, and the RBA will cut. I doubt they will validate market pricing, but it is easy to see -25bps of cuts in each of Nov and Dec.
[If there is demand, I will publish some charts of these rates. Let me know in comments]