Thursday, February 7, 2013

NZ employment signals still mixed, but HLFS weakness getting harder to ignore

The good news in today’s Household Labour Force Survey (HLFS) was that after three consecutive quarterly increases in the unemployment rate that saw a recent peak of 7.3% in the September quarter of 2012, the unemployment rate declined to 6.9% in December.  The bad news is it declined for all the wrong reasons.  Employment fell 1.0% in the quarter while the participation rate dropped sharply.  Both are signs of a labour market that is not in good health.

Apart from the drop in unemployment the only other mild positive to take out of this result was that the weakness was centred in part-time work while full-time employment rose.

If I was pressed for a reason for the weakness I would conclude that the labour market is a lagging indicator and the weakness in the December quarter reflects the soft patch in the economy in the second and third quarters of 2012.

However, the mixed signals come from the fact that over the last few quarters a significant gap in employment growth has opened up between the HLFS and the Quarterly Employment Survey (QES).  The HLFS shows a 1.4% decline in employment over the 12 months to December, while the QES shows growth of 1.4%. That’s quite a gap.

The HLFS employment data is also inconsistent with other data on the labour market and broader economy.  Increases in wages and unit labour costs are running at just slightly below trend.  Businesses are telling us they intend hiring and are finding it difficult to find skilled labour.  That does not sound to me like a labour market that’s going backwards.

Furthermore, we think GDP expanded 0.7% in the December quarter which puts annual growth at around 2.1% in calendar 2012. If employment really did fall 1.4% over the year, that suggests productivity growth of around 3.5%.  Now that’s a stretch.  Even if it’s true, it’s unlikely to be sustained.

However, the longer the weakness in the HLFS goes on, the harder it is becoming to ignore.  We continue to believe the economy is expanding modestly and that we will see a tick-up in growth this year on the back of construction in Canterbury and Auckland.  That should be consistent with modest jobs growth and a trend decline in the unemployment.  Emphasis on the “should be”....