October Labour Force: gradual softening still intact
Employment: +42.2k (from +12.8k). Unemployment Rate: 4.3% (from 4.5%). Participation Rate: 67.0% (from 67.0%).
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- Employment was firmer than expected in October after a weaker showing in September, leaving growth on a three-month average basis around ½ppt below the pace six months ago.
- The unemployment rate fell 0.1ppt from a ‘thin’ 4.5% (4.45%) to a ‘fat’ 4.3% (4.34%); after smoothing for monthly volatility, the unemployment rate is still clearly tracking a gradual uptrend.
- All of the ‘whiplash’ in unemployment over the past two months was driven by youth, while unemployment in the larger adult cohort has consistently risen since mid-year, now to a cycle high of 3.3% in October.
- A stronger result in October broadly offsets the weaker result in September, leaving the underlying narrative unchanged: the labour market is gradually softening and becoming ‘less tight’.
Employment printed above expectations in October, rising +42.2k (0.3%), exceeding Westpac’s forecast (+15k) and the market consensus (+20k). Looking past the monthly volatility, growth in employment held steady at 1.5%yr on a three-month average basis, around ½ppt below the pace of six months ago. This recent slowing in employment growth has come alongside a deceleration in population growth, with the employment-to-population ratio down 0.4ppts since the start of the year, although it has been a little more stable around 64.0% in recent months.
As discussed in our latest Market Outlook, the rebalancing of employment growth from the ‘jobs-rich’ care economy to the relatively less jobs-intensive market sector is a key driver of the trend softening in employment growth – a consequence of the growth drivers switching over from public demand to private demand. Complete detail on how the industry mix is faring will be available in about three weeks’ time with the Q3 Labour Account, due December 5.
The stronger showing in labour demand in October was met with a stable picture around labour supply, with the labour force participation rate holding steady at 67.0%. This translated to a +25.2k lift in the size of the labour force, implying a decline in the level of unemployment of –17.0k. This saw the unemployment rate fall 0.1ppt, but since the starting point was a ‘thin’ 4.5% (4.45%) in September, the decline was enough to see the unemployment rate fall to a ‘fat’ 4.3% (4.34%).
All of the whiplash over the past two months has been driven by the cyclically sensitive and often-volatile youth cohort, with the youth unemployment rate surging from 9.7% to 10.6% in September, back to 9.6% in October. Large ‘jumps’ in youth unemployment historically has been a leading indicator for softening in labour market conditions for the broader adult cohort. Indeed, the adult unemployment rate has risen consistently since mid-year, now to a cycle high of 3.3% in October.
Once again, after smoothing for some of this monthly volatility with a three-month average, the overall unemployment rate is still clearly tracking a gradual uptrend – from 4.0% in December, to 4.1% in March, to 4.2% in June, to 4.3% in September, and now close to rounding up to 4.4% in October. It is worth emphasising that there are many examples of consecutive months with offsetting surprises within the Labour Force Survey, but underneath those large swings is often a consistent trend -- and in this case, it is one of a gradual softening from a tight starting point.
As we discussed previously, and as the RBA noted more recently in their November Statement of Monetary Policy, there are competing force around the labour force participation trend – a cyclical unwind driven by easing cost-of-living pressures and cooling labour demand, which is seeing marginal participants leave the labour market, all while demographic factors are driving a structural uptrend. Which of these forces ‘dominates’ – or alternatively, how much of this cyclical unwind is left to run – will be key over the next 6-12 months.
Another area through which this cyclical unwind is appearing is underemployment, which largely captures part-time workers who desire more hours. Today’s data revealed that it returned to 5.7% in October, back around recent lows. As noted by Chief Economist Luci Ellis last year, with cost-of-living pressures easing, people may no longer need extra hours or second jobs, and are less likely to report themselves as seeking more hours.
Conclusion
While October’s data was solid, it largely offsets a weaker-than-expected read in September. To our mind, the underlying narrative has not changed: the labour market is gradually softening and becoming ‘less tight’.
Reacting to the September figures, RBA Governor Bullock said that the data contained “some signal” and “some noise’. In light of today’s data, though, we think the RBA are more likely to cite the October figures as a reason to dismiss the September signal. This would be the expected response from a central bank that is more concerned over the risk of persistent above-target inflation.
With a labour market not posing any material upside risks to inflation, nor deteriorating rapidly enough to warrant major concern, the RBA can remain squarely focussed on assessing multiple quarterly prints for inflation and regaining confidence that underlying inflation is indeed on track to continue moving toward the mid-point of the target range next year.
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