Australia’s labour market remains resilient as the US Fed cuts rates

Ahead of next week’s RBA meeting, the key Australian data drop this week was the August 2024 Labour Force report. Overall, the report was a reasonably strong one: the unemployment rate was unchanged on the previous month at 4.2 per cent and in line with market expectations while the monthly rise in employment of 47,500 comfortably outpaced the consensus forecast for a 26,000 increase.

With the participation rate once again at a record high and the employment to population ratio also close to its own previous peak, there was no sign in last month’s jobs numbers of any dramatic labour market weakening, and hence little to trigger a rate cut from the RBA on 24 September.

Meanwhile, the big international economic news of the week was the US Federal Reserve’s decision to cut the target for the federal funds by 50bp to a range of 4.75 to five per cent. This was the first policy rate cut from the US central bank in more than four years. The accompanying statement explained that the Federal Open Market Committee (FOMC) had ‘gained greater confidence that inflation is moving sustainably towards two per cent, and judges that the risks to achieving its employment and inflation goals are roughly in balance’ before adding that the decision to ease policy came ‘in light of the progress on inflation and the balance of risks.’ All but one of the 12 FOMC members voted in favour of the decision, with the single holdout advocating for a 25bp cut.

There are several points worth noting about the Fed’s move this week.

• As noted in last month’s extended catch-up edition, there had already been plenty of evidence that the international monetary policy cycle had turned. Even so, the Fed’s decision to cut rates is the definitive indicator that the global rate cycle has entered a new phase of policy easing. All else equal, a looser US monetary policy should be supportive of global economic activity. It will also make life easier for those central banks – particularly in emerging markets – that had been waiting for a Fed move before starting their own easing cycles.

• While a rate cut had been widely expected, there had been some debate over its likely size, with market pricing over the previous week having moved towards the probability of a more aggressive policy response. Those expectations proved correct as the FOMC opted for a large 50bp rate cut rather than a regulation-sized 25bp move. The last time the Fed delivered a bumper rate cut was in response to COVID-19 in March 2020 when it announced a 50bp cut that was then followed in quick succession by a 100bp cut. So, while the FOMC statement referenced above claims that the risks to inflation and employment are ‘roughly in balance’, the decision to go with 50bp rather than 25bp looks like a contra-indication, suggesting that in practice the Fed is now relatively more worried about downside risks to US activity and employment than it is about inflation persistence. In other words, the Fed has decided to take out some additional policy insurance against downside risks to the economy. Does that mean the FOMC should have acted sooner? In the post-meeting press conference in response to a question along these lines, Fed Chair Powell said that a 50 bp cut did not mean that the central bank had fallen behind the curve but rather was a ‘sign of our commitment not to get behind.’

• The September FOMC meeting brought a new set of economic projections (pdf) from members. The median projections for core PCE inflation are now 2.6 per cent for this year (measured as the annual change in the December quarter), 2.2 per cent for next year, and two per cent by 2026. That suggests a somewhat faster pace of disinflation than the numbers presented in the FOMC’s June 2024 projections, which had core PCE inflation slowing from 2.8 per cent to 2.3 per cent to two per cent over the same period. The corresponding projections for GDP growth are little changed, while the unemployment rate is now expected to be higher than was the case back in June.

• The new median projections for the Fed Funds rate are for the mid-point of the target range to end this year at 4.4 per cent (implying 50bp of additional easing to come in 2024) and then fall further to 3.4 per cent by year-end 2025 (implying a further 100bp of cuts) and then ease again to 2.9 per cent by year-end 2026 (for a cumulative total of 200bp of additional rate cuts). That represents a more rapid near-term or front-loaded rate of policy adjustment than the median FOMC forecast had assumed in June, when it had projected the policy rate to only fall to 5.1 per cent by year-end before dropping to 4.1 per cent and then 3.1 per cent over the same period.

• The timing of the rate cut – just ahead of the November US Presidential elections – and its size means that it will inevitably be politically controversial in some quarters. As such, it might generate some more discussion around the future independence of the Fed.

• While the Fed’s decision, and the shifting global backdrop more broadly, will have a significant influence on the RBA’s operating environment, it is unlikely to see Australia’s central bank mimic its US counterpart with a rate cut at next week’s meeting, not least because of the ongoing strength in the Australian labour market noted above. Instead, the RBA is much more likely to leave rates unchanged for a seventh consecutive meeting.

More detail on this week’s Australian employment numbers below, along with a look at what the RBA has been saying about labour market conditions and what this all means for monetary policy settings, as well as the usual roundup of other weekly releases and linkage.

Finally, another reminder about next month’s economics webinar. The topic is Australia and the New Economics of Industrial Policy, and the live session will be held on Thursday 17 October from 12 to 1pm. You can register here. As usual, the webinar will be free for AICD members.

August saw strong employment growth and a steady unemployment rate

The ABS August 2024 Labour Force release reported that the Australian economy saw employment increase by 47,500 or 0.3 per cent (seasonally adjusted) over the month. That was considerably stronger than the market consensus forecast for a 26,000 increase and means that in annual terms, employment growth is now running at 2.7 per cent. By way of comparison, the annual rate of growth of the working age population has slowed to 2.6 per cent. All that increase in employment came in the form of part-time work, however, which was up 50,600. In contrast, full-time employment fell by 3,100 people.

The employment to population ratio rose to 64.3 per cent in August, which is just below the November 2023 record high of 64.4 per cent. The participation rate was unchanged at its current record high of 67.1 per cent.

Monthly hours worked in August were up 0.4 per cent over the month and 1.7 per cent over the year.

The number of unemployed people fell by more 10,000 last month, dropping from 637,400 in July this year to 627,000 in August and leaving the unemployment rate unchanged at 4.2 per cent. That outcome was in line with the median market forecast. Likewise, on a trend basis the unemployment rate was flat at 4.1 per cent for a third consecutive month.

The underemployment rate rose 0.2 percentage points to 6.5 per cent last month but the overall underutilisation rate was unchanged at 10.6 per cent, still well below the pre-COVID (March 2020) rate of 13.9 per cent. The ABS noted that although the proportion of people working reduced hours due to sickness remained above pre-pandemic levels, the proportion working less hours than usual due to economic reasons was below pre-pandemic levels.

The RBA, the labour market, ‘full employment’ and inflation

With the RBA Board meeting over 23-24 September, it is useful to consider these numbers in the context of what the RBA has been thinking about the state of the Australian labour market and what this might mean for monetary policy.

Before digging into the central bank’s current assessment, it’s worth recalling that while the RBA has long had ‘full employment’ as an objective of monetary policy alongside low and stable inflation, the 2022-23 Review recommended that this dual mandate be made more explicit, and this recommendation was implemented in the December 2023 Statement on the Conduct of Monetary Policy (the Statement ‘records the common understanding of the Reserve Bank Board and the Government on key aspects of Australia’s monetary and central banking policy framework.’) The relevant paragraphs state:

‘The Government’s objective is sustained and inclusive full employment where everyone who wants a job can find one without searching for too long…the Reserve Bank Board’s role within this is to focus on achieving sustained full employment, which is the current maximum level of employment that is consistent with low and stable inflation. The Reserve Bank Board commits to regularly communicating its assessment of how conditions in the labour market stand relative to sustained full employment, drawing on a range of indicators and recognising that full employment is not directly measurable and changes over time.

The Reserve Bank Board commits to clearly communicating how it is balancing its inflation and full employment objectives. More generally, when inflation is expected to be significantly away from the midpoint of its target of between 2 and 3 per cent or labour market conditions are expected to deviate significantly from those consistent with full employment, the Board commits to communicating how long it expects it will be before it again meets each of its objectives and why.’

The February 2024 Statement on Monetary Policy (SMP) contained an in depth analysis of full employment, explaining that the concept ‘cannot be observed directly or summarised by a single statistic.’ It also notes that ‘Any individual indicator, such as the unemployment rate, provides only partial information on the state of the labour market, while model-based estimates provide a broad guide of how the labour market stands relative to full employment. Given these limitations, the RBA does not target a fixed level of full employment.’ Instead, the RBA Board ‘aims to achieve the maximum level of employment consistent with low and stable inflation.’

It follows from this definition (and from the way in which the RBA and most other central banks think about how the economy works) that as well as full employment being directly important because it represents one half of the central bank’s dual mandate, it is also significant because of the relationship between inflation and employment. Put simply, that’s because when employment exceeds its full employment level, an overheated labour market is likely to produce upward pressure on wages and therefore on prices. Likewise, when employment is below its full employment level, this could be expected to generate downward pressure on wages and prices. Michele Bullock sketched some of this out in her first speech as Governor, when she spoke about the complementarities and trade-offs involved in Australian monetary policy.

So, where does Martin Place think we currently stand relative to its full employment target? According to the August 2024 edition of the SMP, the then unemployment rate (4.1 per cent as of June 2024) remained ‘below estimates of the rate consistent with full employment.’ That message was repeated by the RBA Assistant Governor (Economic) in an 11 September 2024 speech on Understanding the journey to full employment. According to Sarah Hunter, the RBA’s ‘current assessment is that the labour market is operating above full employment but has moved towards better balance since late 2022.’ By then the unemployment rate had edged up to 4.2 per cent (as of July 2024). That was still a little below Treasury’s estimate of the Non-accelerating Inflation Rate of Unemployment (NAIRU) of 4.25 per cent, which is also around the market’s median estimate. As already noted, the latest numbers as presented in the August Labour Force survey have the unemployment rate unchanged at 4.2 per cent – so still a little below the NAIRU.

While the NAIRU offers one way to get a handle on the state of the labour market, we have already noted that the RBA does not think that full employment can be easily captured by a ‘single metric.’ Instead, both the February 2024 SMP and Assistant Governor Hunter’s speech explain that the central bank considers an array of labour market indicators including but not limited to the unemployment rate, along with other data sources plus estimates derived from ‘a suite of models.’

As already laid out, this week’s labour market release delivered updates on an important subset of those indicators. Some of these (the unemployment and underemployment rates) have risen from their post-pandemic lows while nevertheless remaining below their pre-pandemic levels. Others (the participation rate and the employment to population ratio) are currently either at or close to record highs. All of which is suggestive of a still-tight labour market.

Looking beyond the labour force release, other key indicators tracked by the central bank include data on job vacancies and job ads, survey measures of businesses’ employment intentions, and insights from the RBA’s own liaison program. Broadly speaking, these indicators are consistent with the same story about the labour market told by this week’s labour force numbers.

Finally, the RBA also pays attention further along the chain of causation: that is, it looks at the growth in wages that is the outcome of the degree of labour market tightness. Here the central bank reckons that there are signs the pace of wage growth has peaked, although it remains elevated relative to pre-COVID levels (a time when Martin Place worried that wage growth was too low relative to the inflation target).

A further complication here is that while wage growth may have started to slow, Australia’s rate of growth in labour productivity has remained disappointingly weak. Indeed, in levels terms productivity is now only around the same as that achieved back in 2016. That means that the overall rate of change in growth unit labour costs – given by the difference between nominal wage growth and productivity growth – remains higher than is consistent with inflation returning to target.

What else happened on the Australian data front this week?

According to the ABS, Australia’s population has now officially exceeded 27 million. The Bureau said that our population was 27,122,411 people as of 31 March this year. Population growth was 0.6 per cent over the quarter and 2.3 per cent over the year. Of the total gain over the year of 615,300 people, 105,500 (17 per cent) was due to natural increase while 509,800 (83 per cent) reflected the impact of net overseas migration.

The ANZ-Roy Morgan Consumer Confidence Index rose 1.8 points to an index reading of 84.1 points in the week ending 15 September 2024, taking the measure up to an eight-week high (albeit still a little below the recent July 2024 peak). Four out of five subindices increased, led by a 3.1-point gain in ‘future financial conditions’ which climbed to a six-month high. The short-term and medium-term economic confidence measures and the ‘time to buy a major household item’ subindex were all up by more than two index points. The exception to this otherwise general uplift was ‘current financial conditions’ which fell 1.2 points. Despite last week’s increase, however, the overall confidence index has now been below 85 for a record 85 consecutive weeks. The survey’s measure of ‘Weekly inflation expectations’ rose 0.2 percentage points to 4.8 per cent.

Last Friday, the ABS published quarterly tourism labour statistics for the June quarter 2024. There were 634,000 tourism jobs, down 1.8 per cent (11,500 jobs) from the March quarter, but up two per cent (12,300 jobs) relative to the same quarter last year. Tourism – which spans 12 industries – accounted for an estimated four per cent of all filled jobs in the Australian economy. By industry, tourism employment is led by work in Cafes, restaurants, and takeaway food services (195,900 jobs), retail trade (106,900 jobs), accommodation (74,000 jobs) and Education and training (67,100 jobs).

The ABS also released new numbers on labour hire workers. According to the Bureau, in June 2024 416,500 people had a job in Labour supply services. Over the past decade, employment in the Labour supply services industry has grown from two per cent of total employment to 2.9 per cent as of June this year. (Labour hire work is defined by the ABS as characterised by a third-party arrangement, where there is: (1) an employment relationship between an individual employee and a labour hire firm, and (2) a commercial arrangement between the labour hire firm and another business for the supply of the individual employee's labour, for a fee.)

Other things to note . . .

• The ABS released an information paper on Measuring and Valuing Australia’s Ecosystems ahead of next year’s publication of the first experimental National Ecosystem Accounts. The Bureau also published the September quarter 2024 Methodological News which reports on the Computer Assisted Telephone Interview (CATI) experience.
• Two pieces from the AFR, one arguing that the ‘insolvency Armageddon’ is all hype, and the other considering how to boost productivity growth in government services.
• From the RBA, a new Research Discussion Paper examining the macroeconomic costs of occupational entry restrictions (OERs, which are the legal requirements people need to meet to enter certain professions such as electrician, accountant or architect). The Discussion Paper finds that for services provided to consumers, OERs tend to be more stringent here in Australia than in the average OECD economy, while for services provided to businesses, they tend to be less stringent. The authors find that more stringent OERs tend to be associated with lower business entry and exit rates and a slower flow of workers from less productivity to more productive firms, suggesting the possibility of negative implications for productivity. The authors also report ‘tentative’ evidence that OERs tend to be associated with skills shortages. Finally, they caution that their findings do not necessarily suggest that OERs should be less stringent, but rather that any benefits need to be balanced against material economic costs.
• A speech from the RBA Assistant Governor (Financial System) discussing financial innovation and the future of central bank digital currency (CBDC) in Australia. Related, the RBA and Treasury have issued a joint paper on CBDC and the Future of Digital Money in Australia. The paper considers two forms of CBDC: a ‘retail CBDC’ that would be designed for use in retail payments by the general public and a ‘wholesale CBDC’ that could be used in wholesale payments and settlements between financial institutions. The headline judgements here are that ‘a clear public interest case to issue a retail CBDC has yet to emerge in Australia’ although both RBA and Treasury ‘remain open to the possibility that this assessment could change over time.’ In contrast, the report argues that ‘the potential benefits and use cases for a wholesale CBDC seem more tangible at this point.’ As a result, the two institutions’ future work program will ‘prioritise CBDC initiatives in wholesale applications.’
• Why the Treasurer should be concerned about China’s struggling economy.
• Dani Rodrik ponders whether a new trilemma haunts the world economy. Rodrik worries that it may prove impossible to simultaneously combat climate change, boost the middle class in advanced economies, and reduce global poverty, since any combination of two of these goals often appears to come at the expense of the third. But he also sees the promotion of labour-absorbing services as offering a potential way out of the trilemma.
• In the FT, Martin Wolf writes about overcoming the Middle Income Trap and in particular the challenges posed by the need for economies to shift from a focus on the quantum of investment to the adoption of new ideas and the promotion of domestic innovation.
• A look at the history of central bank independence.
• Dan Davies on productivity growth and the mean reversion imps. The focus here is on the UK, but the argument has broader applicability.
• Two interesting IMF blogs. The first reckons that trade balances in China and the United States mainly reflect domestic macro forces, rather than industrial or trade policies. In the case of China, the Fund’s diagnosis is that the zero-COVID policy and the property market correction have seen investment contract even as household savings rates increased. Meanwhile, the United States has seen a halving of the household saving rate along with substantial growth in the government's fiscal deficit. The piece observes that the impact of savings behaviour in the two economies has been largely offsetting, with the negative effect of higher Chinese savings on global real interest rates balanced by a rise in US real rates. The second blog examines the relationship between fiscal policy and politics, drawing on an analysis of 65 advanced and emerging market economies over six decades to argue that parties across the political spectrum have converged on de facto support for bigger government and more spending.
• Related to that second piece, the WSJ analyses the rising burden of US federal government debt and how it has become a political non-issue for the two major parties.
• The OECD’s Education at a Glance 2024.
• The Economist magazine ponders the pros and cons of physical proximity in the workplace.
• The difficulties of governing cyberspace.
• Why we shouldn’t trust the data on extreme human ageing.
• How the future looked back in 1974.
• The Odd Lots podcast has a wide-ranging conversation with Adam Tooze on economic developments in the United States, China and Germany.
• The Past, Present, Future podcast has been running a series on counterfactuals in history. Recent episodes have asked, what if Franz Ferdinand had survived Sarajevo, what if the Russian Revolution hadn’t been Bolshevik, what if the 1919 Paris Peace Conference had actually kept the peace, and what if the Berlin Wall hadn’t fallen?