May Labour Force: bounce-back from weaker base
Employment: +40.3k (from –40.7k). Unemployment Rate: 4.4% (from 4.5%). Participation Rate: 66.7% (from 66.6%).
Click here for: Westpac Chart Pack – May Labour Force
- The May Labour Force Survey (LFS) was in line with our forecasts, with a bounce-back in employment (+40.3k) and a tick-down in the unemployment rate from 4.5% to 4.4%.
- Results have been especially volatile over the last two months: April’s employment figures were revised even weaker, and the unusual timing of the April survey over Easter set the stage for a rebound in May.
- Looking past these sources of noise, there appears to be a genuine weakening taking hold. Employment growth has cooled from its nascent recovery earlier in the year – from an average gain of around +25k/mth over Q1, employment has stalled flat over April and May.
- While the unemployment rate temporarily dipped lower around the turn of the year, it is once again trending higher on a three-month average basis, while the participation rate has held broadly steady around an average of 66.7%.
- The shock associated with the Middle East conflict and recent interest rate rises is almost certainly in train, and it will still take time to fully work its way through to the labour market, but it appears as though some of the weakness over the last two months is reflecting this dynamic.
May LFS in line with forecasts
The May LFS was in line with our forecasts. Employment bounced back +40.3k in the month, above the market median forecast of +32.5k but closer to our forecast of +45k. The unemployment rate also eased as expected, edging down from a cycle high 4.5% to 4.4% in May.
However, there were two major sources of noise over the last couple of months, both of which impact how analysts should interpret the recent data. We called both of these out in our preview ahead of the data release.
Firstly, there were significant downward revisions to April’s employment figures, now reported as a decline of –40.7k compared to an initial reading of –18.6k. This relates to a strong upward bias in the population projections used by the ABS to calculate the level of employment. This upward bias usually appears in the first month of each quarter, initially inflating the results for employment. Then, in mid-quarter months, the ABS re-benchmarks to official population estimates, resulting in downward revisions. This source of volatility was once again on display over April and May, and it happened to be particularly large.
Secondly, some volatility can be tied to a survey timing issue with the April LFS, which ran over the full Easter long weekend (Good Friday & Easter Monday). This is fairly uncommon in the survey’s history, which means there could have been a bit more holiday-related softness captured in the raw data than usual, that was not fully removed by seasonal adjustment. When we compare to recent years that this ‘full overlap’ has happened before (2012, 2015, 2023), we have tended to see weaker employment in April, followed by a rebound in May. The ABS nodded to this in their media release, stating that there was a backlog of people waiting to start a job in April, who then moved into employment in May.
Genuine weakening underneath the noise
Westpac already anticipated these sources of volatility before the April data was published, but the challenge was deciphering how much of April’s reading was explained by these factors. Our view, at the time, was that there was likely some genuine weakness underlying the noise from survey timing and population projection bias. Now that we have the full picture with May’s data, we are more confident in that view. Employment growth has clearly cooled from its nascent recovery earlier in the year – from an average gain of around +25k/mth over Q1, employment has stalled flat over April and May.
One of the key parts of our labour market view is that employment growth would soften at a faster clip than labour force growth, causing a rise in the unemployment rate and amid stable participation. That is the state of play at the moment – after the unemployment rate temporarily dipped lower around the turn of the year, it is once again trending higher on a three-month average basis, while the participation rate has held broadly steady around an average of 66.7%.
Results around hours worked also confirm our central view. The bounce-back in May was foreshadowed by the fact that monthly hours worked did not initially surprise to the downside like employment, instead rising by 0.9% in April. As we noted in our preview, monthly hours worked may not have been impacted by the same holiday-timing issue as the employment statistics. At the same time, there have been shifts in leave-taking behaviour in recent years, even after accounting for the seasonality in holiday-timing, with fewer people taking leave around Easter compared to pre-pandemic years.
May’s unwind in hours worked, falling –1.1%, reflects some payback from the shifting seasonal behaviour of less leave-taking in April. Underneath this, it may also suggest that employers are finding themselves with less capacity to offer extra hours. Our card tracker shows that discretionary consumer spending is weakening as the impact of elevated inflation and higher interest rates works its way through the economy. This aligns with business survey measures that point to a combination of slowing conditions, acute input cost pressures and a deeply pessimistic view on the economic outlook.
What does this mean for the outlook?
Today’s data suggests that while there has clearly been some noise in the data recently, there is genuine weakness forming underneath. The shock associated with the Middle East conflict and recent interest rate rises is almost certainly in train, and it will still take time to fully work its way through to the labour market, but it appears as though some of the weakness over the last two months is reflecting this emerging dynamic.
We expect the bulk of the labour market softening to arise in the second half of this year, once the impact of the Middle East shock and interest rate rises have had more time to reverberate throughout the wider economy. We are forecasting the unemployment rate to lift to a quarter-average of 5% in early 2027, driven by slower hiring rather than active labour shedding, with employment growth staying slightly positive throughout (but lagging growth in the total labour force).
Our forecasts are based on an energy price shock and interest rate response that produces a more abrupt slowdown in economic growth and rise in unemployment compared to the latest forecasts from Treasury and the RBA. Another point of difference between the RBA and our forecasts is that they have a much more pessimistic view on labour force participation, hence why they see a much more muted rise in unemployment compared to us. .
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