Help wanted – why Oz job adverts hold the key
Summary: Although Australia's housing market is under severe pressure, the country's central bank expects employment growth and an uptick in consumer spending to mitigate the ill effects. This is why it's a good idea to monitor employment patterns, especially via job advertisments.
Australian households are under pressure to maintain spending habits as the property market continues to deteriorate given that most are significantly overleveraged and have whittled down their savings down to around decade lows. In our view, the central bank is too optimistic and will need to cut the cash rate, but until there is evidence of labour market strength tapering off, the RBA will be less inclined to cut rates.
Whilst the economy is vulnerable, and growth continues to lose momentum given that the labour market strength holds the key to the RBA's next policy move and likely Australia’s economic trajectory, we are watching the labour market leading indicators closely.
This week, ANZ job advertisements, which are typically a leading indicator of labour market conditions (unlike unemployment, which is lagging), recorded their steepest year on year loss in five years. Total job advertisements for the month of March sunk 1.7%, the 5th consecutive month of declines. This continued decline indicates a slowdown in hiring ahead and potential uptick in unemployment.
The job ads data is compiled by ANZ from the number of jobs advertised in the major daily newspapers and Internet sites covering the capital cities each month.
But, this job ads data is at odds with another labour market leading indicator. ABS job vacancies data which tracks the number of specific job openings in the economy as reported by Australian employers. Job vacancies include both newly created and unoccupied positions (or those that are about to become vacant) where an employer is taking actions to fill these vacant positions.
According to the ABS job vacancies are at record highs, signalling the labour market may remain robust despite advertisements falling. The divergence between the 2 indicators could reflect a change in the way businesses are looking for new employees, with more reliance on LinkedIn or other mediums not included in the ANZ job advertisements survey. If this is the case, this would render the ANZ job advertisements a less useful leading indicator of future labour market vigour.
Capacity utilisation is essentially a measure of firm’s productive efficiency. Average production costs usually to fall as output rises therefore increased utilisation can reduce unit costs, making a business more competitive. When demand is high, firms will use an increased proportion of their labour and capital and invest more to up their output and meet this increased demand.
There is a fairly close relationship between capacity utilisation and unemployment, as firms then scale back hiring when output is pulled back.
Capacity utilisation as reported in the NAB Business Survey is below the long-term average of 81.1%, which could signal unemployment may rise in the months ahead.
To date, the labour market so far remains resilient, unemployment is now sitting at an 8-year low of 4.9%, but unemployment is a lagging indicator, so the data only give us a rear-mirror view on the health of the economy. Given that strength in the labour market is crucial in determining the RBA’s next policy move, it is vital to watch these leading indicators for clues on the path for monetary policy.
We don’t necessarily need to see unemployment move up in a big way, given that it has remained the RBA’s pillar of strength in the domestic economy. If this were to crumble, there is probably a relatively low threshold for moving to a cut, given that the option has been opened for a potential downwards move in the cash rate. In our view, the RBA will move to cut the cash rate in the second half of this year, but so long as employment remains at a cycle low, the RBA will not fully capitulate on policy guidance.
Latest Market Insights
Quarterly Outlook Q3 2022: The Runaway Train
- Central banks' attempts to kill inflation is a paradigm shift, which could end in a deep recession.
Tangible assets and profitable growth are the winnersWith US equities officially in a bear market, the big question is where and when is the bottom in the current drawdown?
Understanding the lack of investment appetite among oil majorsThe everything rally seen in recent quarters has become more uneven, as its strength is driven by commodities in short supply.
The pressure is on as the wind leaves the sailsWith cryptocurrencies in sharp decline, are we entering a crypto winter or is the bear market a healthy clean-up of the crypto space?
Why the Fed can never catch up and what turns the US dollar lower?Many other central banks are set to eventually outpace the Fed in hiking rates, taking their real interest rates to levels higher than the Fed will achieve.
Bank of Japan: Swimming against the tideThe Japanese economy has gone from the age of deflation to rapidly rising prices in no time, leaving the Bank of Japan in a pickle.
Green transformation detour and bear market hibernationWith the impending risk of global econonomic derailment, we share the five things investors need to consider in this new half year.
Crisis redux for the eurozone?Whether there's going to be a recession in Europe or not, the path towards a stable economy will be agonizing.
Technical Outlook: Gold, Oil and a remarkable multi-decade perspective on EquitiesThe Nasdaq bubble pattern, USDJPY resistance, crude oil uptrend losing steam and the technical outlook for USD.
China: the train of new development paradigm left the station two years agoChina is transiting to a new development paradigm, as they are hit by deteriorating terms of trade, a slower global economy and an uncertain future while continuing attempts to contain the pandemic.