THE WEEK AHEAD: The jobs riddle

In the perfect world we would know exactly how many jobs are created every month and how many people were looking for work. And while technology could bring us closer to that nirvana situation over the next decade, we are still currently a long way short of that.

The simple fact is that the monthly labour force estimates are compiled from a survey – and quite a small survey at that. Each month the Australian Bureau of Statistics surveys people from around 29,000 dwellings, as well as some hotels and motels, to get a gauge on the workforce. How small is that sample? Well, the ABS says it covers 0.33% of the population. That is a third of 1%.

In other words, the sample is very modest. Could the ABS do a better job? Well yes, but it all gets down to government funding. If the Government doesn’t allocate the funds, then the ABS can’t employ the extra people to do the surveying.

The problem though is that policymakers like the Reserve Bank rely on the ABS figures, the risk being that bad data could lead to bad decisions. But in practice that tends not to happen. The Reserve Bank knows that it has to look at trends, rather than single month figures and to look at other data, such as its own survey of businesses. Private sector economists should also be focussed on trends but it’s amazing how many lose sight of the fact when assessing the latest statistics.

Take the data on hours worked. The seasonally adjusted figures bob around each month but some saw the most recent fall in hours worked as disappointing. But if you looked at the figures more broadly it is clear that hours worked have been trending sideways since April. The ABS recommend that users of the data focus on the trend, but the advice generally goes unheeded.

Similarly the unemployment rate has been trending sideways since June. A modest up-tick in the October seasonally adjusted results may appear disappointing, but it is more ‘noise’ rather than anything more concrete. And employment appears to have bottomed in May before moving higher in trend terms in the period since.

Overall, the jobless rate does appear to have peaked at a level close to 6%. Federal Treasury believes unemployment could lift to 6.75% before peaking, but the trends don’t currently point to that outcome. Businesses also don’t yet appear to be taking on more full-time staff, but they are taking on part-time workers and getting existing employees to work longer hours. In other words companies are taking the normal cautious approach you would expect in the early stages of economic recovery. And that response is precisely the sort that the Reserve Bank would view as encouraging, rather than worrying.

The week ahead

In contrast to the last few weeks, the economic calendar for the coming week is more sparsely populated. The highlight is the release of minutes from the Reserve Bank’s (RBA) last Board meeting, while there is a spattering of economic statistics to keep it interesting.

The RBA Board minutes are released on Tuesday while RBA Assistant Governor Guy Debelle delivers a speech on Wednesday. The talk deals with securitisation, so it is largely aimed at practitioners in financial markets. Guy Debelle also takes part in a panel discussion at a financial conference on Thursday.

The $64 million question is whether the Reserve Bank will increase interest rates for a record-breaking third consecutive month when Board members next meet on December 1. The language of the minutes from the November 3 meeting will be closely watched for clues. The RBA has noted that policy will be tightened ‘gradually’, although we are no clearer about what this means in practice.

In terms of economic data, wages will be in the spotlight over the week. The wage price index is released on Wednesday while average weekly earnings data is issued on Thursday. We expect that wages grew by around 0.8% in the September quarter with annual growth slowing to a five year low of 3.7%. While people have held onto their jobs over the past year, part of the trade-off has been slower growth in wages. Not only have pay increases been trimmed, but also some businesses have been forced to cut salaries. This trade-off between wages and jobs hasn’t been without its challenges for workers but it has been enormously positive for the broader economy.

The other economic data to watch includes October import figures, released on Wednesday, with the Reserve Bank Bulletin issued on Thursday.

The main interest in the Reserve Bank Bulletin is the latest credit and debit card statistics – figures that provide insights into consumer spending trends and attitudes. While Aussie consumers are still spending, they are doing so cautiously, preferring to use their own funds (EFTPOS), rather than credit, to make purchases. This consumer conservatism is a development that retailers are watching very closely.

In contrast to Australia, the US economic calendar is more tightly packed. The main indicators to watch are those focussing on economic activity such as retail sales (Monday), industrial production (Tuesday) and housing starts (Wednesday). Retail sales probably rebounded 0.8% in October (up 0.4% if auto sales are excluded) with production up for a fourth straight month, lifting 0.4%. And housing stats may also have edged higher in the month judging by comments from builders.

Inflation is in focus as well with producer price figures on Tuesday and consumer prices on Wednesday. Also thrown in for good measure is the Empire State survey (Monday), capital flows (Tuesday) and the leading index and Philadelphia Fed survey (both on Thursday).

The US Federal Reserve chairman, Ben Bernanke, has been quiet of late but that all changes on Monday when he is scheduled to deliver a speech. There are six other speeches by key officials scheduled over the week.

Sharemarket

The Australian sharemarket still appears locked in a sideways trend. Over the past two months the ASX 200 and the All Ordinaries have broadly held between 4,500-5,000 points. Similarly the US Dow Jones has held between 9,500-10,500 points. A breakout on the upside looks more likely, but what would trigger it? Most likely investors would want more encouragement on the US economy, so data over the coming week will provide a major test.

Interest rates

There is now just over two weeks to go to the final Reserve Bank Board meeting of 2009. And it’s clear that interest rates will finish the year only modestly lower than where they started. Even just four to five months ago few would have tipped that, but it shows that a lot can change in a short space of time. The cash rate started 2009 at 4.25% and the Reserve Bank sliced 1.25 percentage points from rates over February and April, taking cash to a 49-year low of 3%. In the space of seven months, rates were slashed by 4.25 percentage points.

But almost as remarkably as rates were cut, now they are quickly being restored to more ‘normal’ levels. Rates were lifted a quarter of a percent in both October and November and we are on the verge of an historic third straight rate hike in December. The Reserve Bank Governor asks the question: “of all the decisions I could make, which would I regret the least.” Given how quickly the economy has rebounded, the Governor would certainly regret leaving rates too low, for too long.

Currencies & commodities

Is the Australian dollar strong or is the US dollar weak? In fact both apply. The Aussie dollar is being supported by relatively high interest rates and a solid economy. Conversely the greenback is out of favour with investors because of low US interest rates and a weak economy. To better assess the level of the Aussie currency, the trade-weighted index is generally referred to. And the latest reading shows the TWI at 15-month highs. The US dollar only accounts for 9% of the TWI, well below the Chinese renminbi, the Euro and Japanese yen, currencies that collectively account for 46% of the index.

Craig James is chief economist at CommSec.