Today's numbers were what I expected when speaking to a colleague a few minutes before the release: a bit of payback in the total employment numbers after months of incredibly strong growth, but a reduction in the participation rate, which had hit all time record highs but tends to bob around month-to-month. I expected the combined result to generate a lower unemployment rate, which it did printing at 5.0% (actually lower if you do not round). The two interesting questions are: (1) are we at the full employment rate of unemployment below which we start seeing wage price pressures; and (2) what will be the impact of the QLD floods on the next few unemployment prints? On the first, the consensus is broadly yes.
In fact, if you throw in $6 billion plus of extra public and private investment in QLD over the next year or two, and the $37-43 billion worth of spend on the NBN that does not seem to be incorporated into market economists' forecasts for aggregate demand, combined with new found price pressures arising as a result of the tragic destruction of the supply-side in QLD, the inflation outlook suddenly got a lot more complex.
In relation to the second question, I will take a counter-intuitive stand based on no hard analysis and speculate that a material fall in the QLD participation rate in January will offset reduced employment growth such that next month's unemployment numbers print near 5.0% (ie, we do not get a big spike in UE).
Here is what HSBC's Paul Bloxham had to say today:
"The key message is that the labour market was tight in December. The Goldilocks story of employment growth being equally matched by increased participation in the labour market is turning out to be too good to be true. As a result, the unemployment rate fell to 5.0%, though if you look a little deeper, technically it is now in the 4s: 4.98%. Interestingly, the unemployment rate for males has fallen more than females, which may reflect the types of jobs that are being created in the economy – construction and mining etc.
These signs that labour demand is running ahead of labour supply are likely to be concerning for the central bank, which has a keen eye on wage and inflationary pressures. As we have said before, the labour market is probably the best guide to what is happening in the economy at the moment. We think this is also likely to be the view the Reserve Bank.
The floods in Queensland are clearly a significant event for the economy, and will clearly affect the labour market too. Our view remains that while they are a short term downside risk to activity, in the medium-term the reconstruction efforts and expenditure on replacing durable goods will boost the economy. This boost will occur at a time when the economy is already operating at near-capacity and the labour market is already very tight. Indeed, the unemployment rate for those skilled in construction and mining is likely to already be very low. The likely result is further upside risk to inflation."
JP Morgan's Helen Kevans answered the full employment question in the affirmative:
"Having overshot market expectations each month since March last year, the employment numbers surprised on the downside today. The employment report showed that only 2,300 jobs were created in December (J.P. Morgan: +20,000; consensus: +25,000) - still a small positive result but one that was in sharp contrast to the 32,900 average monthly gains recorded throughout 2010. None theless, the economy still managed to add a record 364,000 jobs in CY2010. Further underscoring the strength of the labour market, more than 80% of these were full-time.
Indeed, the labour market report was far from bad news. The unemployment rate slipped from 5.2% to 5.0%, a level we believe is consistent with full employment. This fall was, to some extent, helped along by a drop in the labour force participation (LFP) rate, but with the participation rate still running well above its long-run average, the drop in the unemployment rate and, more generally, the tightness of the labour market, cannot be discounted."
Aloha from Hawaii.
