An unemployment rate with a six in front of it last week gave everyone a scare. But the people who are fretting about it are six months behind the curve, and are missing the forest for the trees.
The employment data out last week were a disappointment to many. Particularly the unemployment rate, which nudged up to 6.0% – the first time the unemployment rate’s had a six in front of it in ten years.
The papers had a field day. Unemployment rate highest in ten years. Unemployment hits decade high. Unemployment is going to break into your house at night and eat your cat.
Man, what short memories we have. I remember a time in Australia when we dreamed of having an unemployment rate with a six in front of it. And I remember economists telling us that, with all the churn in the labour market, 6% was about as much as you could hope for.
And then there’s the international context. 6% still makes us the envy of the world. The wheels of the economy haven’t fallen off just yet.
And never mind that the labour force data, like all monthly series, is pretty volatile. A lot of economists say that monthly data is too noisy to worry about. That’s why we have quarterly inflation data, not monthly.
But I’m not trying to put a gloss on things. I’m not trying to spin this in some kind of good news story. There was nothing ‘great’ in the data.
Employment fell another 4,000, and is flat over the year. We didn’t manage to create any new jobs in 2013.
There’s no positive way to spin this.
We’re helping people spend more quality time with their family?
But there’s something a little off with the labour market data. Taken at face value, it seems to be at odds with a lot of other economic indicators.
The housing market is the obvious example. Prices continue to surge, and nationally are into double-digit growth year on year. There’s action on the construction side of things as well. New building approvals were 22% higher over the year to December, pointing to a veritable boom in the construction industry (though of course it is coming off a low base.)
But it’s not all about housing. Retail sales also continue to do well. They grew at their fastest rate since 2009 in December, pushing towards 6% year on year. Surveys of business conditions have also jumped sharply in the past few months, pointing to a fairly robust outlook in the business community.
So what do we make of it? Seems like we’re kinda getting two contradictory messages. So which is it?
Are these indicators misleading us, and the economy is actually getting weaker? Or is the labour force survey misleading us?
Well, it’s kind of neither.
The thing to remember is that there’s always a lag between economic activity and jobs. The economy starts to improve, economic activity picks up, but firms take a while to get hiring again. They want to make sure the pick up in demand is permanent. So they run the existing workforce a little harder, until they’re sure.
Then they start hiring again.
And so generally (and this comes from the economists now) employments lags activity by about 6 months to a year. It’s fairly consistent rule in economics.
So to understand what’s happening with employment now, we need to cast our minds back six months to a year.
And that takes us back to before the housing market turned, when the influence of mining sector was transitioning, and there was a fair bit of uncertainty in the global outlook.
Most economists now reckon the domestic economy turned around September 2013, supported by a boom in housing, and the employment data is still catching up.
Indeed, if you look at the forward indicators of employment – like job advertisements and the employment questions in the NAB and ACCI business surveys, it shows that conditions have stabilised in recent months.
If this story is right, then I think we could expect to see employment pick up sometime around April or May.
It’s certainly not the doomsday scenario the papers would have you believe.
Not that I can really blame them. The high-profile job losses at Holden, Toyota and SPC-Ardmona have put job losses on the front-page.
And what a lot of people take from this that Aussie jobs are going out the door.
But that’s the wrong end of the stick. While the SPC decision was a bad political one I think, the closure of Holden and Toyota represent a long-run and inevitable decline in manufacturing.
Harrison Polites over at Business Spectator runs the numbers and lists the top 5 employment growth sectors in the country, highlighting that while manufacturing has continued to shed workers, some industries are booming.
The top 5 are:
- Food and Drink Services: Where employment has increased almost 30% since 2007.
- Heavy and Civil engineering – it’s workforce of 150,000 is 50% bigger than 5 years ago, thanks in part, but not entirely, to the mining boom.
- Private Social Assistance services – things like residential aged care and child care. Employment here is up 50% as well, but with the baby boomers just starting to retire, we’ve only seen the thin edge of the wedge on this one.
- Private education – up 20%
- Online Retail – also up 50%. It’s a small industry with only 25,000 workers, but it’s growing rapidly.
The point is, despite all the doom and gloom we get in the media, there are long run factors behind the recent high-profile job losses – not cyclical factors.
And if we look at the cycle, then we can see that employment is still catching up, but there’s no cause for alarm yet.
So there’s plenty of upside.