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Thursday, September 8, 2011

RBS dissects the employment data and finds some interesting stuff...

From RBS's Kieran Davies:

"Strong hours worked and weak employment indicates that firms are hesitating in hiring new staff. Estimates of hours worked are very poorly measured, but show an increasing gap between hours worked and employment. For example, employment has been broadly unchanged since April, while total hours worked are up 1.7% over the same period as average weekly hours have risen from 35 hours per week to 35.6 hours. This suggests that companies have become more uncertain about the outlook and are increasing the hours of their existing employees rather than hiring more staff. If this is the case, then it is similar to the experience of 2008-09, when firms slashed work hours rather than make deep cuts to staff numbers.

The gross flows estimate of employment was strong, but with a modest trend. The "gross flows" estimates of employment only cover those people common to successive labour force surveys and exclude the people who are rotated in and out of the survey each month. These were up 29K in August after a broadly flat July, which was the strongest result since June last year, with the trend running at about 15-20K per month. Comparing gross flows with headline employment growth, the gross flows are much steadier, suggesting that rotation of new people into the survey inflated employment growth last year and is lowering it this year.

Forward indicators have been volatile and point to better growth in employment than we are seeing. Leading indicators of employment have been mixed, but point to moderate jobs growth rather than the weakness seen over the past two months. This is true for the range of private-sector indicators, such as the NAB survey, the AIG survey, and ANZ job ads. Contrasting this with the trends in employment and hours worked, this suggests that firms plan to increase their workforces, but are hesitating to hire and are increasing work hours instead.

The RBA would be watching the rise in unemployment carefully. The RBA has said that it is on hold as it waits to see the impact of global events on the economy. To date, the economy seems to be growing strongly, with the resources boom intact and consumer spending strong as households switch from retail goods to services. The strength in hours worked is consistent with solid growth in activity, although it is being driven by firms working their employees harder rather than hiring new staff, such that the unemployment rate has risen. This is an unusual situation as normally rising unemployment would be driven by both weak employment and weak hours worked. If this trend continues, the unemployment rate would tick higher despite solid economic growth. A sustained rise could see the RBA trim its inflation forecasts if it was accompanied by weaker unit labour costs growth, which would reduce the need for rate rises to contain inflation (note that their Phillips Curve model of inflation implies inflation would be capped at the top of the target band when unemployment is in the low 5s). The caveat to this is that the gross flows estimates suggest that the underlying trend in employment is better than the headline seems, although historically the RBA has still been driven by the actual unemployment rate, which is why we would have to reconsider our rates view if there was a material deterioration in unemployment."