Tuesday, November 9, 2010

Weekly Commentary : Jobs on the turn

New Zealand’s suite of labour market indicators for the September quarter showed an improvement in keeping with the economy’s modest pace of recovery.

The Labour Cost Index (LCI) rose 0.5% in Q3, a slight improvement over last quarter’s 0.4% gain. Private-sector ordinary time wages were up 0.6%, while public sector wage growth lagged at 0.3%. The uptick in wage growth is partly due to the time of year: most people get their wage rise in the second half of the year, and because the LCI is not seasonally adjusted, this normally shows up as stronger wage growth in the second half.

That said, there are signs that wage growth has passed its nadir and is now inching higher. The ‘unadjusted’ LCI, which is an inferior measure of labour costs but a better indicator of the economic cycle, rose 1.1% after a 1% increase last quarter – a sustained improvement over the 0.5% per quarter increases in late 2009 and early 2010. Similarly, the Quarterly Employment Survey (QES) registered a 1.0% increase in the average hourly wage, which was stronger than expected.

The Household Labour Force Survey (HLFS) reported a fall in the unemployment rate to 6.4%, from an upwardly revised 6.9% in Q2 and a peak of 7.1% in Q4 last year. The rate is still above average, meaning there is still a bit of spare capacity in the labour market – although perhaps not quite as much as previously thought.

The reputation of this survey has been tarnished to some degree by the extreme volatility seen in recent quarters. We suspect that while the reported levels for this quarter are reasonably reliable, we have less faith in the quarterly changes, such as the 1% jump in employment or the 0.5 percentage point fall in unemployment. This is because some of the volatility has been due to difficulty with seasonal adjustment, which doesn’t greatly affect the September quarter itself, but renders the June quarter a poor point of comparison.

One way to cut through the volatility is to focus on annual rates of change, which show unequivocally that the labour market has improved. Employment is up 1.8% over the past year, with full-time employment up 2.1%. Underemployment (those in work but seeking more) has fallen by 10%. And hours worked per week are up 3.0%. Another alternative is to look at the trend unemployment rate reported by Statistics NZ, which suggests a decline from a peak rate of 6.9% at the end of 2009 to 6.4% today.

The Canterbury earthquake will not have affected the figures too severely. Approximately 70% of interviews in the affected region were completed before the earthquake struck. Statistics NZ cancelled surveying in the affected region for two weeks after the quake. That was a good decision, because people’s responses in that period may have reflected temporary earthquake disruption. Surveying did resume in the affected region three or four weeks after the quake struck, meaning about 2% of the total survey sample represents quakeaffected people.

The industry breakdown of both the wage and employment surveys was an interesting reflection of the times. The strongest wage and jobs growth over the last year has been in export-oriented industries such as agriculture, mining, manufacturing and wholesale trade. Domestically-focused industries generally had more modest pay increases, and employment in finance and insurance has fallen substantially. Wage growth was weakest in central government administration, defence and public safety, with just a 0.8% increase over the past year – a clear reflection of the drive to curtail government spending.

The idea that wage growth has turned higher is consistent with the blueprint for recovery that we have been articulating for some time. Wage growth reached its trough about one year after the lowpoint in economic activity, and about one quarter after unemployment peaked. We expect economic growth to regain momentum as agricultural growing conditions improve, high commodity prices wash through the economy, and house prices stabilise following the recent decline in mortgage rates. All this should add up to more vigour in the employment scene through 2011. Consequently, we’d expect gently declining unemployment and a slow grind higher for wage inflation over the next two years.

The news that the unemployment rate is above-average but falling won’t have surprised the RBNZ or the market. That said, the possibility that previous quarter’s jump was more than just seasonal noise was being seriously entertained beforehand. That possibility has now been priced out, so there was quite a large confirmation effect in market prices once the data was published. The two-year swap rate rose 9bp on the day, and the implied timing for the resumption of OCR hikes has shifted from April to March.

The HLFS came on the heels of the Fed’s announcement of its new quantitative easing programme. Between them, these two events pushed the NZ dollar to a 30-month high of 79.7c against the US dollar.

Fixed vs. floating: The RBNZ’s more cautious stance suggests that floating rates will remain on hold for several more months. Fixed-term rates could rise in that time, but only if there is a substantial turnaround in sentiment on the global economy. As a result, there is no urgency to fix right now.
Full report: Weekly Commentary : Jobs on the turn

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