Jobless rate slides to 17-month low

Labour Force

What happened? Employment soared by 115,200 in May after falling by 30,700 in April. The unemployment rate fell from 5.5 per cent to a 17-month low of 5.1 per cent (5.07 per cent to two decimal places).

Also of note: The Reserve Bank Governor delivered a speech. He noted that a material lift in wages, necessary to push inflation to the 2-3 per cent target range, was “some way off.”

Implications: Unemployment continues to fall, boosting job security. So the latest data is positive for companies in the consumer staples and consumer discretionary sectors.

A raft of companies is affected by the employment data but especially those dependent on consumer spending.

What does it all mean?

• The jobs data has bounced around over the last few months. The end of JobKeeper explains part of it as well as the more-than-usual amount of ‘seasonality’ associated with holiday periods (more people taking holidays). The last few results probably should be averaged to get a clearer assessment. But this is clearly a cracker result. This is the biggest six-month improvement in the jobless rate on record.

• The big picture story is unambiguously positive. More jobs are being advertised (ads at 12½-year highs) and more people are finding work. This is just not important in terms of the spending power of the newly employed, but also the boost to confidence of those people in jobs.

• The question – just like it is being posed in the UK and US – is whether the job market is even tighter than the statistics show because of skill mismatches. Employers are crying out for staff in a raft of industries. So expect more initiatives like the ASEAN work visas for rural workers from the Federal and State governments.

• In a week’s time data will show those sectors that have been most successful in putting on workers. A little more digging will show the regions and age groups that have been doing best in the job stakes.

• CBA Group economists expect the jobless rate to keep falling in coming months, reaching 5 per cent by end-2021 and falling to 4.7 per cent by end-2022. The Reserve Bank and the Federal Government both have a goal of reaching ‘full employment’ – a jobless rate near 4.0-4.5 per cent. And that is some way off together with the goal of 3 per cent wage growth and a 2-3 inflation rate.

• The minimum wage decision was well structured. The 2.5 per cent wage increase covers the 1.1 per cent lift in inflation and is in line with RBA hopes of 3 per cent economy-wide lift in wages. The staggering of the wage increase is sensitive to the conditions affecting travel, retail and service sectors.

• It will be important for investors to monitor statements and quarterly business updates from listed companies, specifically watching for comments on wage and price pressures and implications for revenue and profit margins. Industries like mining, construction and domestic-directed tourism businesses are particularly vulnerable given strong activity levels.

What do you need to know?

Labour force – May

• Employment rose by 115,200 jobs in May after falling by 30,700 jobs in April. Full-time jobs rose by 97,500 and part-time jobs rose by 17,700 positions. The number of people employed rose to a record high of 13.125 million.

• The unemployment rate fell from 5.5 per cent to a 17-month low of 5.1 per cent in May.

• Hours worked rose by 1.4 per cent to a record high of 1,814 million hours. Hours worked are up 13 per cent on a year ago.

• Participation rate: The participation rate rose from 61.3 per cent to 61.7 per cent in May.

• Spare capacity: In May, the underutilisation rate fell from 13.2 per cent to a 8-year low of 12.5 per cent (lowest since February 2013). The underemployment rate fell from 7.7 per cent to 7.4 per cent – a 7-year low.

• Unemployment across states in May: NSW 5.0 per cent (April: 5.5 per cent); Victoria 4.8 per cent (5.5 per cent); Queensland 5.4 per cent (6.1 per cent); South Australia 5.8 per cent (5.7 per cent); Western Australia 4.7 per cent (5.0 per cent); Tasmania 5.7 per cent (6.2 per cent); Northern Territory 4.5 per cent (3.8 per cent); ACT 3.6 per cent (3.4 per cent).

Speech by Reserve Bank Governor: “From Recovery to Expansion”

• The Governor reflected on the economic recovery. However he downplayed inflation risks, noting that wage growth remained low and that businesses were looking to cut costs rather than lift prices in response to higher raw material prices. Businesses were also “relying on non-wage strategies to retain and attract staff. Some are also adopting a ‘wait and ration’ approach: wait until labour market conditions ease, perhaps when the borders reopen, and until then, ration output.”

• Overall the Governor noted “that there are a range of factors that are contributing to limited upward pressure on wages, even in tight labour markets.”

• Bottom-line is that the super-accommodative financial conditions won’t be ending any time soon. The Governor did note that the program of bond purchases will continue once the current program ends in September.

Published by Craig James, Chief Economist, CommSec