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Friday, 21 June 2019

Supply side responds (rates to fall again, again...)

Capacity increases

A quick look at the regional labour force figures, often overlooked by the commentariat, although to be fair Commsec always provides a very neat summary report. 

Across the May quarter there was yet further strong jobs growth (+133,400), driven by a bounce-back in the atrophying manufacturing sector (+43,000), taking total employment up a record high of 12.7 million. 

Even now some 1.18 million Aussies remain directly employed in construction, though this pales compared to healthcare and social assistance at 1.68 million or 13 per cent of total employment.

Employment in Greater Sydney has increased by a thunderous +111,000 over the past year to a record high of 2.84 million.

And yet the annual average unemployment rate in Sydney is no longer falling, now stubbornly sitting at 4.2 per cent, having even lifted a little. 

In Melbourne the annual average unemployment rate has continued to decline, now down to 4.8 per cent (much improved from 5.8 per cent a year earlier). 

Elsewhere, though, there remains oodles of slack.

What gives?

When I last did the Business Insider Devils & Details podcast (sadly now departed!) in the first half of 2018, I riffed my belief that we were "a long, long way from full employment, and, in my opinion, policy has been too tight".

If you listen back to the podcast I explained my rationale (and personal bias, hailing from a resources region crippled by unemployment), but noted that I get paid for what I think will happen, not what I think should happen.

My observation at the time was that there wasn't much appetite for interest rates falling any lower than they already were, so the base case was rates on hold as far as the eye could see. 

Flexible labour force

So, what changed?

One of the surprises, well explained by RBA Governor Lowe yesterday, has been that the supply of labour has increased considerably in response to the stronger demand for workers.

Employment has increased by a massive +360,000 or +2.9 per cent over the year to May 2019, as I explored here

But although there's been steady progress in reducing the number of unemployed persons over recent years, for a range of reasons the capacity of the labour market has increased, and even now full employment or NAIRU appears to be as far away as ever

This is reflected in a record high participation rate of 66 per cent, and perhaps in a structural shift towards more part-time or contract employment. 

With inflation still far below target and sinking, the implications of this for policy could be profound. 

Financial markets certainly think so. 

Lowe noted that annual private sector wages growth has at least increased from a ghastly +1.9 per cent to +2.4 per cent. 

But depending on where NAIRU proves to be, there could be tens or even hundreds of thousands of Aussies needlessly unemployed, with the economy trundling along at stall speed

For this reason markets are pricing for another interest rate cut in July, with more to follow before the year is out, while bonds have rocketed.

You can make your own assessment, but to me July sounds like a lock - why wait? - with further easing quite likely to follow:

Source: RBA

Finally for today, the median duration of job search in May was 17 weeks, unchanged from the prior year, though there's been some modest improvement in the trend over time.

The mildly positive trend has mainly been due to Melbourne, and a bit of an improvement in Brisbane.