Monday, May 11, 2015

US unemployment rate continues trend lower

The steady trend improvement in the US labour market is such that the US unemployment rate is now firmly lower than that of Australia...and New Zealand.  What does that tell us about monetary policy in each of these countries?  

U.S. jobs growth recovered in April to +223k after the disruptions of the first quarter that saw a weak GDP out-turn and a soft jobs gain in the March month that was revised down to just +86k, showing disruptions in that month were greater than initially thought.

With the outlook for monetary policy, in particular the timing of “lift off” for US interest rates the topic de jour interest in this report wasn’t just centred on the degree of jobs growth bounce-back from March but also signals on spare capacity (the unemployment rate) and wages, especially given the recent acceleration in the employment cost index.

The unemployment rate dipped lower again to 5.4% reflecting a stronger employment gain in the household survey and came despite a tick higher in the participation rate to 62.8%.  The participation rate appears to have stabilised in recent months despite structural headwinds. 

Furthermore while full-time employment fell over the month and part-time rose, the recent trend has been towards growth in full-time jobs.  That has seen a big drop in the number of people working part-time for economic reasons (i.e. they would prefer to work more hours if they were available).  That has seen a steady decline in the broader measure of under-employment (U6) which now stands at 10.8%.

The stabilisation in the participation rate and the lower U6 “underemployment” rate are both indicative of the structural improvement underway in the labour market.

Wages as measured by average hourly earnings were up only 0.1% in the month and 2.2% over the year.   That's lower and a still flatter trend than the recent sharp move higher shown in the Employment Cost Index.  That’s largely explained by the fact that the ECI is a broader measure of employment costs.  

So there was really no new news for this for the FOMC other than supporting their view that March quarter weakness will prove transitory.  Furthermore wage growth seems consistent with higher inflation in time.  Remember the FOMC won’t wait for inflation to be consistent with their mandate before raising rates – they just need to be confident it’s going to get there.  That said June “lift-off” seems unlikely with September the likely earliest timing of the first rate hike.

The steady trend lower in the US unemployment rate is in stark contrast with recent developments in Australia and New Zealand.  Last week’s April employment report out of Australia showed weak employment growth (although that followed two stronger months of employment gains) and an unemployment rate at 6.2%.  The unemployment rate has been stuck in a 6.1% to 6.3% for a year.  And after showing a more modest trend improvement, the New Zealand unemployment rate is now appears stuck at 5.8%.

Of course the underlying labour market dynamics are quite different between Australia and New Zealand.  Australia’s elevated unemployment rate is a reflection of an economy that is running below trend with weak demand for labour.  Annual employment growth was only +1.5% in Australia in the year to April.

By contrast New Zealand’s employment growth in the year to March was +3.2%.  Our stubborn unemployment rate is a reflection of strong growth in the supply of labour with growth in the working age population being driven by strong net migration and a high participation rate which, as with the US, is the sign of a healthy well-functioning labour market.

Nevertheless high unemployment, regardless of the underlying dynamic, signals spare capacity in the labour market and likely subdued wage growth and low inflation pressure emanating from the labour market.  That’s part of the reason why the Reserve Bank of Australia has been easing monetary conditions recently and part of the reason why the Reserve Bank of New Zealand has shifted to an easing bias.

In moving to an easing bias last month the RBNZ highlighted wage setting behaviour as one of the factors they are watching closely.  The question is the extent to which the economy and the labour market can continue to expand without putting extra pressure on wages at a time when the Labour Cost Index (effectively unit labour costs) is at +1.8% and therefore already not far off being consistent with a return to 2% inflation.  It’s the outlook for labour market supply and demand that holds the key to the timing of the RBNZ’s next move. More on all the factors the RBNZ is weighing later this week.