Once again the Household Labour Force Survey defied prediction, with the unemployment rate bouncing to 6.8% in the June quarter.
The measured unemployment rate has been astoundingly volatile lately. In the last year it has gone from 6.5% to what was first reported as 7.3% (since revised to 7.1%), down to 6.0%, then up to 6.8%.This variability has been frustrating when it comes to telling a story of how the recovery is tracking, but for that reason we didn’t completely buy in to the sharp improvement to 6.0% in Q1. Last week’s release confirms that the previous reading was a false signal.
Looking through the volatility may be the best way to interpret the data. The notion that unemployment has dropped gradually after peaking at the end of last year fits better with our understanding of the broader economy, and our a priori forecasts. It also fits better with other evidence such as the Quarterly Employment Survey, surveyed hiring intentions, surveyed difficulty finding labour, job advertisements and benefit payments, all of which have shown steady improvement over the past 6-9 months.
If the survey is to be taken literally, there have been huge and unprecedented changes in the labour market status of 20- 24 year-old males. In the March quarter, an unusually low number of these young men were unemployed, only to re-enter the ranks of the unemployed this quarter. This caused relatively modest changes in the raw number of unemployed people – down 5,000 in March and up 2,000 in June. But those modest changes were the opposite of the normal seasonal pattern. So applying a seasonal adjustment exaggerated the movements manyfold.
Employment fell by 0.3%, taking the gloss off last quarter’s 1% increase. However, there were a few saving graces in the details. The fall in total employment was entirely due to part-time jobs; full-time employment actually rose 0.2%, on top of a 1.4% increase in Q1. Along similar lines, the economy-wide number of hours worked was up 0.6%, which is broadly consistent with our forecast of 0.7% GDP growth over the quarter.
There was also a more encouraging message from the two employer surveys earlier in the week. The Labour Cost Index, the cleanest measure of trends in wages, advanced 0.4% in Q2, a slight improvement over last quarter’s 0.3%. Private sector wages were up 0.5%, while public sector wage growth had its weakest showing since 1999, with just 0.2% growth over the quarter. The muted wage growth to date is an echo of last year’s recession, rather than a sign of things to come.
The Quarterly Employment Survey also indicated modest wage growth, but the more interesting detail wasin the activity indicators. Total hours paid were up 1.2%, building on last quarter’s 1.1% growth, while FTE employment rose by 0.5%. These series don’t closely follow their equivalents in the household survey from one quarter to the next, but at least in recent times the QES has appeared to be the more stable of the two surveys.
So while there are good reasons to cast a wary eye at the volatility of the official unemployment measure, the overall message seems to be one of gradual improvement in the labour market. Any concerns that the RBNZ may have had about a tighter labour market provoking early wage rises and higher inflation will have evaporated after last week’s releases.
The other event of note last week was Fonterra’s monthly auction. Milk powderprices fell 8.3%, making it a total drop of 24% from their peak in the last four months. Fonterra’s initial payout forecast for this season was $6.90-7.10/kg; our estimates suggest that this is still achievable if world prices and the NZ dollar hold around current levels. But of course that’s a big if, and Fonterra may decide to take a conservative approach and prepare farmers for the possibility of something less.
One point to bear in mind is that we estimate that NZ dairy production could up as much as 8% on the previous drought-afflicted season. That will mean a lot more product hitting the international market, and we can’t be sure how much impact that will have on world prices.
To date, our forecast track or the OCR has been consistent with 25 basis point hikes at every review until early 2012, although we’ve suggested treating this as a risk-weighted forecast, with as much risk of larger hikes as of pauses depending on how the data pans out. It’s clear that for now the risks are being realised more on the downside, so we have adopted a slightly more modest tightening profile, with a pause in the near future to assess the landscape – pencilled in for December and January.
Having said that, we still expect further OCR hikes in September and October, and the September Monetary Policy Statement will continue to outline a plan for returning the OCR to more normal levels. The RBNZ has been at pains to emphasise that the current level of the OCR is “very supportive of economic activity”, and has onsistently articulated a plan for a gradual normalisation. Recent data won’t be enough to completely derail such a well-developed plan at this early stage.
Fixed vs. floating
The decision to fix or float remains finely balanced. Floating rates remain lower than short-term fixed rates at the moment, but they are likely to rise faster as the RBNZ increases the OCR. Fixing, if even for a short term, has the advantage of greater certainty around cash flows, at a time when floating rates could be rising rapidly. Repaying more than the minimum amount, and spreading the loan over a mix of terms, can also help to reduce the overall risk around uncertain future interest rate changes.
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