Pete Wargent blogspot

Co-founder & CEO of AllenWargent property buyer's agents, offices in Brisbane (Riverside) & Sydney (Martin Place), and CEO of WargentAdvisory (providing subscription analysis, reports & services to institutional clients).

5 x finance/investment author - 'Get a Financial Grip: a simple plan for financial freedom’ (2012) rated Top 10 finance books by Money Magazine & Dymocks.

"Unfortunately so much commentary is self-serving or sensationalist. Pete Wargent shines through with his clear, sober & dispassionate analysis of the housing market, which is so valuable. Pete drills into the facts & unlocks the details that others gloss over in their rush to get a headline. On housing Pete is a must read, must follow - he is one of the finest property analysts in Australia" - Stephen Koukoulas, MD of Market Economics, former Senior Economics Adviser to Prime Minister Gillard.

"Pete is one of Australia's brightest financial minds - a must-follow for articulate, accurate & in-depth analysis." - David Scutt, Business Insider, leading Australian market analyst.

"I've been investing for over 40 years & read nearly every investment book ever written yet I still learned new concepts in his books. Pete Wargent is one of Australia's finest young financial commentators." - Michael Yardney, Australia's leading property expert, Amazon #1 best-selling author.

"The most knowledgeable person on Aussie real estate markets - Pete's work is great, loads of good data and charts, the most comprehensive analyst I follow in Australia. If you follow Australia, follow Pete Wargent" - Jonathan Tepper, Variant Perception, Global Macroeconomic Research, and author of the New York Times bestsellers 'End Game' and 'Code Red'.

"The level of detail in Pete's work is superlative across all of Australia's housing markets" - Grant Williams, co-founder RealVision - where world class experts share their thoughts on economics & finance - & author of Things That Make You Go of the world's most popular & widely-read financial publications.

"Wargent is a bald-faced realty foghorn" - David Llewellyn-Smith, MacroBusiness.

Saturday, 8 November 2014

Labour Force 3.0: Are Some Aussie States Heading for Recession?

Labour Force 3.0 - Winners and Losers

The dust has settled on the once again newly revised Labour Force data, with Thursday's release of the October report. Summarily, there were a few snippets of good news, mainly overshadowed by ordinary news.

Instead of agonising over data concerning hours worked (+1.6 percent) and participation rates (+0.1 to 64.6), which have been covered off excellently by other commentators elsewhere, for something different let's zoom out and look at the macro picture, and in particular which states are the winners and losers from the revised figures.

Unfortunately there are more losers than there are winners. Are there any states which are at risk of falling into recession? Perhaps so. Let's take a look at some of the indicators in four short parts.

Part 1 - Growth in Total Employment - Too Shallow!

The October data showed employment increasing by 24,100 to 11,592,000, which is close to the revised previous high watermark of 11,600,800, with a total of 33,400 full-time jobs added in the month.

This only equates to a total increase in employment of 105,000 seasonally adjusted over the past year and 202,000 over the past two years. Not disastrous, but equally, not nearly good enough!

As an interesting aside, the workforce now comprises 45.9 percent female employees, an equal record high.

Zooming in the total employed chart to a 5 year time-frame immediately reveals the problem with the commentary which focused on a decent month for full-time jobs growth, that being that the good work is more than undone by the two previous months as they now stand post-revision.

There are various arguments as to why this chart could pick up in due course, but the labour market appears to remain soft on this evidence.

With the Aussie dollar having fallen to around 86 cents, markets continue to price in the generally held view that a further interest rate cut in the cycle is only moderately likely. 

Part 2 - Jobs Growth by State

So what does the revised Labour Force show the picture to be at the state level? Not all that great in truth.

With the obvious disclaimer that the numbers have been proven to be more than a tad volatile at present, the surprise winner is Western Australia, adding just over 40,000 positions over the past year, just over half of which were full-time jobs, even beating New South Wales at 36,000 (almost all of which were full-time).

Victoria scraped together a fairly meagre 19,000 additional employed over the past year, and virtually everywhere else the chart looks rather messy.

Plotting a cumulative employment growth chart below for the past 15 years by state underscores the key point that jobs growth appears to be flattening in the large states, and just looks sad in South Australia.

We had previously clipped Tasmania off this graphic since the state didn't truly seem to belong in a chart with the word "growth" in it, with total employment having flat-lined and still being lower today than it was back in 2008. Perhaps we were being too unkind, however, as Tasmania has at last shown some green shoots over the past 12 months.

I put forward the view a couple of years ago that in the absence of some major government contracts (e.g. defence) or the exploitation of a major new resource, South Australia could risk becoming a recession state, particularly with the fallout from the shuttering of the automobile manufacturing industry yet to take its full effect between now and 2017.

Looking at cumulative employment growth below over the past five years shows that the southern states have seen their labour markets in dire straits, although we do note Tasmania has been threatening to move into positive territory.

Although we haven't charted it here since we have no equivalent seasonally adjusted data series available for Canberra, you can also now add the ACT to the list of strugglers with trend jobs growth having stalled completely for well over two years.

Part 3 - State Final Demand

The South Australian economy has not added any jobs in aggregate for nearly five years, and while real estate experts have called a dozen of the last zero Adelaide property booms, we would definitely want to see the labour market improving significantly in order to see any sustainable improvement in the housing market.

South Australia is an export economy, and it has some massive untapped deposits at Woomera, potentially worth tens of billions of dollars. Unfortunately the prices of uranium and copper (as well as gold and silver) have been walloped along with the rest of the commodities index in recent years.

Downwards pressure on copper and uranium prices will also put paid to any Olympic Dam expansion in the near term, unless the science geeks can pull together a heap leaching solution, but even that would not bring a resource expansion back into play until some time after 2020.

So if resources are not to be the saviour at this stage in the commodities cycle, and with the car manufacturing industry in Adelaide due to be shuttered between now and 2017, this perhaps implies that government investment may be required to kick-start the economy.

The naysayers have dismissed Adelaide as a "government town" and an "economic backwater". 

Certainly our research charted on this blog previously has shown that Adelaide suffers from a debilitating brain drain. Yet for all that, there is almost limitless potential within the state's boundaries in the form of untapped mineral wealth.

Are we therefore being melodramatic? Maybe. The annual State Final Demand figures from the Q2 Australian National Accounts, a measure which excludes exports, showed that on an annual basis the mining states of Western Australia and Queensland, as well as the ACT, are all tracking less impressively than South Australia, although it's a fairly marginal call.

The reason for that was predominantly a sizeable and seemingly anomalous spike in Q2 2014 State Final Demand in South Australia, but this is a volatile quarterly series so we will continue to track this as it feeds through the Q3 National Accounts. 

Part 4 - Unemployment by State

The revised Labour Force figures show that the headline rate of unemployment in Australia is now up to 6.2 percent, and the trend remains steadily up.

While the unemployment rates by state have been almost absurdly volatile at times, there was a bit of a rude shock for the Queensland economy this month as the seasonally adjusted unemployment rate spiked to 7.0 percent.

Back in Q2 2007 when the mining construction boom was in full swing the corresponding figure for Queensland was just 3.5 percent, while Western Australia was all the way down at 2.7 percent!

While Queensland has been the only state in Australia to record material regional jobs growth outside of the capital cities since 2006 as we identified here, which is an alarming state of affairs for regional Australia, the unwinding of the mining construction boom now appears likely to result in an elevated unemployment rate for the Sunshine State.

The inherent volatility of the unemployment rates by state have led us to grapple with how best to present the figures, opting in the end for a 4 month moving average, which should present something at least approaching a meaningful result. 

With an unemployment rate of 5.7 percent the New South Wales economy looks very solid. However, with the exception of Western Australia (5.2 percent), all of the other states listed above have seasonally adjusted unemployment rates of 6.8 percent or above, which is plenty too high for comfort or complacency.

The Wrap

New South Wales is clearly the best placed economy, with ample dwelling and other construction in the pipeline, but Western Australia may also surprise with its resilience.

There appear to be some risks of elevated unemployment in regional Queensland, with the coal sector looking particularly vulnerable