The first cracks are starting to appear…
The post-Covid economy has thrown up a few puzzles.
The first was how the biggest barrage of rate hikes in history barely knocked the property market from its stride. I’ve talked about that before.
But the second is how the biggest barrage of rate hikes in history has left the labour market almost completely unscathed.
The unemployment rate got down to a 50-year low of 3.5%. It’s only a smidgen higher than that now at 4.1%.
Economists weren’t expecting that.
And we keep waiting for the economy and the labour market to break.
The RBA in particular has been waiting very keenly for that. With the unemployment remaining at record lows, they have been in very little rush to offer the economy interest rate relief.
But that might be about to change.
Because I get the sense that we’re seeing the first signs of the labour market starting to break. Cracks are starting to show.
The key data point here is the Roy Morgan survey of the labour market. They have a measure of unemployment that is much more realistic than the ABS one. To be counted as unemployed by the ABS, you need to be actively looking for work, ready to start, and not working more than 5 hours a week currently.
If you’re working six hours a week, you’re not counted as unemployed.
Anyway, Roy Morgan’s shadow measure of unemployment and has spiked in recent months. Their underutilisation rate is the highest-level outside of the pandemic.
Roy Morgan’s underutilisation rate is the highest on record outside of the pandemic.
Roy Morgan CEO Michelle Levine describes the surge in labour market underutilisation as “calamitous”.
I don’t know it’s a calamity just yet, but its certainly concerning. Especially when other labour market measures, outside the headline unemployment rate, are starting to look a little soft.
Like job ads for example. Job ads have fallen substantially over the last two years, and suggest that the unemployment rate should be a lot higher than it is.
Hiring intentions in the NAB survey also continue to trend lower, with fewer firms expecting to increase staff levels.
As I’ve written about before, the surge in public sector jobs has masked the weakness in the market economy. Over the past year, almost the entirety of jobs growth has come from the public sector (red bars).
Most of that is in health care and the NDIS. In consumer-facing sectors, jobs growth is negative.
So far this public sector jobs growth has made the overall numbers look good.
But at some point, that’s going to stop, and we’re going to see the jobs market for what it is – pretty weak.
Once that happens, rate cuts should come thick and fast.
DB