Unemployment is refusing to budge in the face of booming jobs growth, keeping wages down

Updated

The jobs market continues to be one of the more perplexing points of contention in the Australian economy.

This week in finance: Labour force data expected to show around 20K new jobs, but unemployment stuck at 5.5pc (Thursday)

Federal Reserve expected to raise rates by 0.25 percentage points (Wednesday US time)

Mini reporting season sees Myer set to announce a big write-down on its assets on top a 40pc fall in profit (Wednesday)

Jobs growth has soared — around 400,000 new jobs created in the past year — while wages growth and the unemployment keep plodding along the same uninspired path.

A new set of jobs numbers out this week are not expected to change perceptions.

The consensus view is another 20,000 or so new jobs and the unemployment rate will be stuck around 5.5 per cent.

The year kicked off with a solid 16,000 jobs in January. It was more than double that in December.

Unemployment ticked down, but that was largely due to a fall in the number of people looking for work, or the so-called participation rate.

The NAB has sniffed the breeze coming through its respected business survey and suggests jobs growth might be softening.

The business conditions' employment sub-index is still solid, but tracking well below what would normally deliver the average 35,000 new jobs a month over the past year.

"Taken alongside our internal leading indicators, which have been much softer this month, we are looking for a below-market jobs growth of 8,000," NAB's Kaixin Owyong said.

The NAB view is that softer employment growth is likely to mean a lower participation rate, and that means unemployment is unlikely to come down in the short-term at least.

It has been seven years since the unemployment rate last ventured under five per cent and it is difficult to see how it will get back there if jobs growth slows.

An unemployment rate stuck in the mid-5 per cent rut along with elevated rates of underemployment — workers who would like, and are available to work, additional hours — is behind the well documented weakness in nominal wage growth.

"There are a few reasons for it [weak wage growth], but the primary one is that there is plenty of spare capacity in the labour market which reduces the ability of employees to negotiate pay rises," CBA's Gareth Aird said.

It becomes even more problematic when you consider a lot of the heavy lifting is done by government spending, not the private sector.

"From a growth rate perspective, public sector employment rose by a whopping 7.6 per cent per annum while private sector employment was up by 2.6 per cent," Mr Aird said.

"Clearly, the headline employment growth figures have been flattered by growth in public sector jobs."

That demand differential between public and private has also translated into marginally higher wage growth in the public sector.

Government spending has also propped up aggregate consumption, with real government spending growing at around four per cent over the past three years — closer to five per cent by the end of last year — while real household consumption was meandering along at under three per cent.

Household consumption is higher than wage growth (around two per cent over the same period), meaning households are continuing to buy at the expense of savings.

So while aggregate demand is holding up well, it is being propped up by hard-pressed taxpayers footing the bill.

While wage growth is slow, it is still enough to keep pushing workers up into higher tax brackets

Mr Aird argues this "bracket creep" means workers are handing over an increasing share of their income to the Government at a time when the savings rate is low, real wages growth is flat and household consumption growth is modest.

"It is no wonder that households are feeling the pinch," Mr Aird said.

It is that "pinch" that is part of the current vicious cycle which starts with unemployment and underemployment not going down and ends with an economy spluttering along well below its potential.

The week's jobs numbers are unlikely to break out of that unhappy loop.

Fed to lift rates again

It all means that the Reserve Bank can't lift rates, while in the US, where jobs growth has seen unemployment cut to around four per cent, interest rates are going up.

And if the market is any guide, they'll be going up this week.

The desk jockeys and algorithms that bet on such things suggest it is close to a 100 per cent certainty the Federal Reserve's rate setting committee will hoist is basic rate by 25 basis points to the band of 1.5-to-1.75 per cent.

That should see the Fed's official rate above that of the RBA for the first time since early in this century.

Given the hike is pretty well a lay down misere, the bigger question is where the Fed's mysterious "dots" — the anonymous predictions of voting members about where rates are heading — line up.

Back in December the dots suggested three hikes this year and two in 2019.

The market has taken the Fed at its word (or dots) and credit conditions will tighten only gradually.

There has been nothing to suggest the Fed would go back to just two rises this year, but if the dots align towards four then it could be a fairly bumpy time on the markets from Thursday morning.

Wall Street finished Friday's session positively, although it was down more than one per cent over the week.

Markets on Friday's close: ASX SPI 200 futures +0.5pc at 6974, ASX 200 (Friday's close) +0.5pc at 5,949

AUD: 77.1 US cents, 62.8 euro cents, 55.3 British pence, 81.8 Japanese yen, $NZ1.07

US: Dow Jones +0.3pc at 24,947, S&P500 +0.2pc at 2,752 NASDAQ flat at 7,482

Europe: FTSE +0.3pc at 7,164 DAX +0.4pc at 12,390 Euro Stoxx50 +0.7pc at 3,437

Commodities: Brent oil +1.7pc at $US66.21/barrel, Gold -0.2pc at $US1313/ounce, Iron ore (Steel Home) flat at $US72.00

The ASX slipped marginally over the week, which wasn't a bad effort given the big banks all fell between two and three per cent as the Hayne Royal Commission started peering into their cupboards and pulling out some rather unpleasant looking skeletons.

Futures trading points to a bounce on opening.

The big commodities, oil and iron ore, both eked out gains despite mounting concerns in both markets.

However, it is the Aussie dollar that is under as much pressure as anything at the moment, falling almost two per cent during the week to just over 77 cents against the greenback — its lowest level this year.

Reporting season sees Myer back in the spotlight

Reporting season splutters back to life briefly this week with Myer, TPG, Nufarm and Sigma Pharmaceuticals all trotting out results.

There will be no sugar coating the Myer result with a profit warning last month slashing first half underlying profit guidance by around 40 per cent to between $37 million and $41 million.

That is already out there, but the bigger worry is the company also flagged an impending write-down in its almost $1 billion worth of assets.

If the write-down sees net assets closer to Myer's market capitalisation of $360 million, it would breach its debt covenant of net assets needing to be above $500 million.

That would mean some rather uncomfortable conversations between the new management of now executive chairman Garry Hounsell and his bankers.

Australia

Date Event Forecast Monday 19/03/18 Tuesday 20/03/18 RBA minutes Insights into March board meeting where rates were unchanged House prices Q4: Backward looking ABS series. -0.2pc in Q3, likely to be around -0.5pc QoQ this time TPG interim result A net first half profit of around $190m forecast Wednesday 21/03/18 Myer interim result Put out a profit warning last month, likely to include a nasty impairment charge Nufarm interim result Half yearly profit from the herbicide maker Sigma Pharmceuticals FY Full net profit of around $60m tipped Thursday 22/03/18 Labour force Feb: Consensus call is 20K new jobs and unemployment holding at 5.5pc Population growth Q3 2017: Becoming topical. Annual growth around 1.6pc Friday 23/03/18

Overseas

Date Event Forecast Monday 19/03/18 EU: Trade balance Jan: Europe runs pretty solid surpluses Tuesday 20/03/18 UK: Inflation Feb: Core inflation running at aound 2.5pc YoY Wednesday 21/03/18 US: Fed rate decision Expectation of another 25bp hike US: Current account Q4: Deficits becoming a political issue, could expand out to $US125bn Thursday 22/03/18 UK: BoE rate meeting A hold at 0.5pc US: Manufacturing PMI Mar: Solid expansion of activity EU: Manufacturing PMI Mar: Solid expansion of activity Friday 23/03/18

Topics: company-news, industry, currency, stockmarket, money-and-monetary-policy, australia

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