A week ago yesterday’s labour force figures would have had economists and analysts running for the hills growling ‘rate rise coming, rate rise coming’.
And in fact some tried to have a go after the release of the February figures and the new near 34 year low unemployment rate of 4.0%, and 37,000 new jobs created, most of which were full-time gigs.
But as we keep emphasising, employment/unemployment is a lagging indicator.
In the US where the economy was weaker, employment rose for much of 2007 as the subprime mortgage crisis and credit market problems developed
The credit freeze broke out last August in the US, but the subprime mortgage mess and problems in the credit markets in the last months of 2006, and only emerged into the sunlight around February-Match 2007.
Since January, unemployment has risen sharply and will go on rising as thousands more people are laid off. The unemployment rate already hit 5.2% in January before easing to 4.8% last month because of a sharp rise of people no longer looking for work.
Some economists would argue that the US economy peaked in the September quarter when Gross Domestic Product hit an annual rate of 4.9%, only to see it slide to an annual rate of 0.6% in the December quarter.
You can’t strictly extrapolate from the US to Australia: our economy is much stronger and the growth in resources and associated sectors far more dynamic. But you can look at the way unemployment has lagged behind growth in the US and wonder if we will see a similar experience here.
That’s why the February jobs figures should perhaps be noted, but not used to justify another assault on inflationary expectations by shoving up interest rates.
After all the Westpac/Melbourne Institute and Roy Morgan poll on consumer confidence both say it’s heading lower, while the National Australia Bank’s survey of business confidence paints a similar picture.
Jobs growth was a very strong 2.9% in the year to February. The economy added 36,700 jobs last month to total 10.666 million, seasonally adjusted. There were a huge 47,700 new full-time jobs (a total of 7.634 million people), and 11,000 fewer part time jobs (3.032 million in total).
Internet jobs fell slightly last month according to the ANZ jobs series.
The ABS figures were far beyond all forecasts.
January’s increase was revised to 21,400 from the initial estimate of 26,800.
The dollar jumped by 0.40 USc to as high as 93.95 USc, after the announcement, and then eased. The ASX fell even more, from being down around 40 points to around 83 points after the news at 11.30 am.
While inflation pressures remain strong and unemployment is low and jobs growth high, retail sales stalled in January, building finance and approvals rose, but were dominated by either refinancing or non private dwellings. Demand for and new financing of new homes, the powerhouse of the housing sector, were both weak.
So that brings us to dire warnings from Goldman Sachs JBWere analysts yesterday morning. In a note on the Australian economy, looking at the consumer and business sentiment surveys, the firm wrote:
"The risk of financial market duress cascading into residential property prices is real.
"The risk of households deleveraging their balance sheets over an extended period of time is also very real.
"Note that in the composition of our bottom of consensus economic growth forecasts (2.5% cf 3.5% for consensus) for 2008 we have not assumed that household’s continue to de-gear.
"It is feasible that this process will show more urgency in 2008, opening up a scenario of even weaker consumption growth profile and a harder landing for the Australian economy than we currently forecast.
"Australian consumption growth looks set to slow sharply in 2008.
"Despite another significant income tax cut scheduled for 1 July 2008 the combination of: • The fading impact of the one-off income bonuses and income tax cuts from mid-2007.
“• 125bp of interest rate hikes since mid-07 which will have their greatest impact on spending in the coming 6-months. • A lagged impact from a sharp decline in ‘active’ mortgage equity withdrawal; and • A sharp decline in household financial wealth, will likely slow nominal consumption growth by around 3.5%yoy through 2008.
"However, the additional complication of: • A dramatic decline in consumer confidence. • An appreciable squeeze on discretionary cash flow as we entered 2008.
“•Signs the established house price market is cooling again. • The strong incentive for the household balance sheet deleveraging process to accelerate into 2008, all suggest the potential for a more extended period of subdued consumption growth in Australia in 2008 and 2009."
If that happens it will be bad news for the areas of the market we though defensive: consumer staples, such as retailers, food, gaming perhaps. Banks might suddenly become attractive simply because they have been oversold, despite all these fears about their bad debts.
And resources might be the last refuge for any bullish investors.
