Downward Revisions To September Data
The Australian October employment report was broadly disappointing. The data showed that 9.k jobs were created over the month, however, there were downward revisions of 20k to September’s data. Despite the downshift, employment quality did improve over the month with full-time employment replacing part-time employment.
Full-time employment rebounded by 41.5k in October whilst part-time employment fell by 31.7k over the same period. October’s full-time employment gain was offset by around 20K of downward revisions to September’s data. Overall, however, there was a positive shift in favour of full-time employment.
Aggregate hours worked rose by 0.9% with year-end growth increasing to 0.9% from a downwardly revised 0.2%. In terms of composition, gains in hours worked were largely the same across all states except for Victoria.
The Unemployment rate held steady at 5.6%, whilst the labour force participation rate also held steady at 64.4%. While full-time equivalent employment has clearly improved, there continues to be a broader underemployment problem.
Output Gap Remains Wide
The output gap, as based on full-time employment as a share of the active population and capacity utilisation, remains at its widest level since 2013. The gap is consistent with considerable disinflation pressure. When there is a significant level of slack in the economy, wage bargaining power is diminished, and the workforce typically doesn’t get fully compensated for inflation and productivity gains. Consequently, there is a strong positive relationship between increases in real unit labour costs and the output gap.
Sluggish wage inflation is consistent with a wide output gap. In 3Q the wage price index increased by just 0.4% whilst year-end inflation slowed to 1.9% from 2.1% previous. Wage inflation is now at its lowest level on record.
Notably, causation seems to be running from employment to wages rather than the other way around meaning that employment growth is not rising as wage inflation slows; both are slowing together. Whilst the RBA has recently noted that employment growth has been supported by low wage inflation, the data suggests otherwise.
Real labour income growth seems to be slowing with clear negative implications for employment growth. Alongside employment growth slowing, real wages have also stagnated in recent quarters with wage and core CPI inflation running at 1.8% annualised. Consumers continue to face a cash flow squeeze from the rising cost of living.
Consequently, despite what the elevated household saving rate would suggest households do feel they have scope to spend. Hence, consumption has become constrained by labour market outcomes as household don’t have the room to consumer from non-labour sources.
RBA Remain Optimistic
The RBA has been remaining optimistic regarding labour market improvement as conventional indicators continue to register growth. These indicators likely include job advertisements and employment components of business surveys. However, these indicators are do not typically demonstrate consistent correlations with employment or aggregate hours worked and lead times can be particularly variable. Hence it isn’t clear whether these neutral readings actually line up with zero growth in the employment data.
As such there are clear challenges to the RBA’s optimistic outlook where inflation, leverage and the output gap actually suggest that further cuts could be warranted in future. Over recent weeks’ inflation expectations have risen however, the output gap has not changed.
For now the Aussie has broken down below the rising trend line support that has underpinned price action over the year. Price is currently challenging the 50% retracement from the May 2016 low with the next key support is structural support located at the July and September lows around .7420/.7443. Below there support comes in at the 61.8% retracement from the May low at .7383.