The author has been described by News Ltd as an "iconoclast", "Svengali", a pollie's "economist muse", and "pungently accurate". Fairfax says he is a "Renaissance man" and "one of Australia’s most respected analysts." Stephen Koukoulas concludes that he is "85% right", and "would make a great Opposition leader." Terry McCrann claims the author thinks "‘nuance’ is a trendy village in the south of France", but can be "scintillating" when he thinks "clearly". The ACTU reckons he’s "an enigma wrapped in a Bloomberg terminal, wrapped in some apparently well-honed abs."

Friday, September 9, 2011

Who called the spike in unemployment?

While the consensus estimate for unemployment was a static 5.1%, a few smart cookies out there anticipated it (or got close) based on insightful analysis. The best forecast was from JP Morgan's team of Stephen Walters, Helen Kevans, and Ben Jarman who hit it right on the head. On Monday this week, they commented:

"Heightened offshore risks have led to an increase in corporate uncertainty, which has prompted some firms to scale back hiring plans. The labour market already has cooled significantly this year—employment contracted in February, April, and very modestly in July—and, on our forecast, contracted again in August. We suspect Thursday’s labour force survey will show that employment fell 15,000 last month, with the jobless rate rising 0.2%-pts to 5.3%, to the highest level since October last year."

The two others that deserve credit are Westpac and an unnamed, but very high profile, interest rate strategist who blogs under the pseudonym, Ricardian Ambivalence. We know that Westpac's Bill Evans has been bearish for a while now, and was the first, I think, to call cuts this year, although Goldman's Tim Toohey and Deutsche Bank were close behind him. The RBA could well prove Bill and his dovish peers to be geniuses before the year is out given the latest unemployment read. On 5 September, Westpac's Matthew Hassan published a very brief note entitled "Internet search traffic suggests rising unemployment." His chart below tells the story. Hassan commented:

"Internet search traffic on unemployment-related topics has shown a notable up-tick since mid-2010. A simple index based on the number of Australian-based Google searches containing four common unemployment-related keywords has tracked steadily higher since May...The index now strongly suggests Australia’s labour market has passed a turning point. Although the short history and relatively untested data source means the index is still ‘experimental’, it picked recent shifts in the unemployment rate well, particularly through 2008-09. With a 3mth lag between related search activity and actual changes, current readings point to an unemployment rate of 5¼% by year end. This is a bigger and more rapid deterioration than currently suggested by business surveys and job ads. Westpac expects the unemployment rate to be 5.2% by Dec."

Finally, there is my old pal Ricardian Ambivalence. He was the first I know of to publicly use the Google Trends data to forecast unemployment, and his pre-release note insinuated a looser labour market (Rismark has been using Google Trends data for years). Sure, neither Westpac, which actually forecast a fall in UE to 5.0%, or RA, who thought it would stay steady at 5.1%, could match JP Morgan. While it is an open question as to how much luck vs. skill explains the JP Morgan numbers, they got remarkably close to the total employment change (-15k vs. -10k) and perfectly picked the UE rate. Finally, the narrative seemed to be the right one as well.