The market traded like it was short following the better than expected jobs data.
At least that is one view of things. The other is that despite a drop in the unemployment rate to 5.2% the report was weak. I am not so sure about that – while the employment to population ratio was constant at 61.7% for the fourth month, and the gain was all part time jobs, i do think that there is something in the unemployment rate.
Leaving participation rate stuff aside, there has been a sideways move in trend hours worked for some time, and if we cut the employment estimate and boosted the ranks of the unemployed by pushing average hours worked to 2007 levels, the unemployment rate can be pushed to ~7.5%.
This has been the case for some time, and until very recently the behaviour of wages suggests we should have worried about the low unemployment rate. Recently, wages have eased, and productivity has picked up, which should allow core inflation to track lower. it remains to be seen if wages remain low. I suspect they will, but it seems fairly uncertain.
Certainly, lower wages growth is required for the economy to regain competitiveness in the non-mining private sector. That is one way out if the currency does not fall.
I think the fiscal policy consequences of this development are clearer than the monetary policy implications. If the decline in participation and hours worked are due to supply side changes, then most of the budget deficit is structural. Deputy Gov Lowe pointed to the unusual increase in employment as a share of the working age population in his ‘normal’ speech this week – it may be that part of the new normal sees that track back down toward more ‘average’ levels.
If the terms of trade decline further, we are likely to find that the budget deficit very difficult to erase. This is not a massive economic problem, but it is likely to be a rather large political issue.
It may turn out that those surpluses were the fruits of a double boom – a demographic and mining boom. Now both ended.