By Alex Tarrant
New Zealand’s unemployment rate continued to fall during the June quarter, hitting its lowest level since near the start of the global financial crisis in December 2008.
This was despite the working age population continuing to grow and the number of people in employment actually falling at the same time. Having unemployment and employment fall while the working age population rises is explained by the number of people who left the labour force – there was growth in the pool of working age people neither in nor seeking work.
The numbers tend to stack up against signs of a somewhat rosy picture of New Zealand’s jobs market overall. A growing number of people moved from part-time to full-time work during the quarter, which contributed to Stats NZ’s ‘underutilisation rate’ dropping slightly to 11.8% - its lowest since December 2008.
The number of youth (15-24 years) not in education, employment or training also dropped, down 1.6 points from the March quarter to 11.1% in June.
Meanwhile, wage growth appeared to hold up, with average weekly earnings rising 0.7% over the quarter to give 2.3% annual growth. CPI inflation was 1.7% over the same annual period. Average hourly wages were up 1.6% on the year as we saw growth in the number of average hours worked per week.
The figures don’t yet appear to be the ‘whites-of-their-eyes’ territory the Reserve Bank has been looking for in terms of whether the economy’s ‘output gap’, or the measure of non-inflationary slack out there, has closed to a point where pressure starts to build. Indeed, ASB economists used the chance to push our their next OCR hike pick from November 2018 to February 2019. Kiwibank economists noted market expectations for the next OCR hike were pushed out a month to September 2018 after the figures were released.
Particularly with the surprise headline result that employment fell. This threw the market a bit - sending the New Zealand dollar down nearly half a cent against the US dollar. However, another survey released the same time - the Quarterly Employment Survey (QES) - indicated that filled jobs rose 0.9% during the quarter, in contrast to the headline employment figures from the Household Labour Force Survey above. It was all a bit over the place, and the two surveys perhaps balance each other out.
Growth in the average number of hours worked per week will have to stop at some point, with jobs then created for new employees. As this contributes to slack being taken from the labour force, economists would say this will then contribute to upward wage pressure, which should then feed through to CPI inflation pressure. ANZ economists said that, looking through the noise, the picture is of a tightening labour market.
If growth in the labour force has indeed topped out – as we might be seeing with a fall this quarter – this might provide some encouragement. However, a few quarters of this might be needed before the RBNZ gains any confidence that the ‘output gap’ is indeed positive. For more see economist reactions below.
Stats NZ said the unemployment rate hit 4.8% during the three-month period, down from 4.9% in the March quarter. Three thousand fewer people were classed as ‘unemployed’ – those available to work, and who had either actively sought work or had a new job to start within the next four weeks.
But while the number of unemployed fell, the number of people in employment also dropped – down 0.2% over the quarter to 2.54 million. Employment was still up 3.1% from a year ago.
Here’s where it can get a bit tricky with the employment statistics – how can unemployment fall while the number of people with jobs also fall? Particularly when New Zealand’s working age population continued to grow, up 0.5% or by 20,000 people over the three months?
This was because of the number of people leaving the ‘labour force’ – mainly women – over the quarter. The number of people not in the labour force (ie not in or actively seeking work) rose by 26,000 people. All numbers here are ‘seasonally adjusted’.
This meant New Zealand’s ‘labour force participation rate’ fell during the June quarter slightly to 70%. This measures the labour force against the working age population. The ‘employment rate’ also fell slightly to 66.7%. This measures employed against the working age population.
Meanwhile, average weekly earnings rose 0.7% during the June quarter from March, giving an annual rate of 2.3% in the year to June – up from 2.2% in the year to March. These were boosted by a 14.4% annual rise in average overtime wages; ordinary time wages were up 2% for the year – below March annual growth but above the final two quarters of 2016. Average hourly earnings were up 0.6% over the quarter, and were up 1.6% for the year.
Today’s labour market figures were very close to market expectations. Looking through quarter-to-quarter volatility, we continue to see the economy expanding at a moderate pace.
The unemployment rate fell to 4.8% in the June quarter, down from 4.9% in March. This is the lowest level of unemployment since December 2008.
In terms of economic activity, the two labour market surveys – the employee-focused Household Labour Force Survey, and employer-focused Quarterly Employment Survey – gave slightly different results. However, overall the results were consistent with continued, but moderate growth in economic activity.
The HLFS recorded a 0.2% decline in the number of people employed (analysts had expected to see a moderate gain). However, we’d caution about reading too much into one quarter’s data.
The QES showed the number of full-time equivalent employee numbers was up 0.7% over the quarter, and are up 2.7% over the year.
Importantly, both surveys showed continued moderate gains in labour hours over the quarter.
The surprising feature of today’s labour market update was a pullback in labour force participation to 70% (down from 70.6%). That was well below market expectations, and is particularly unexpected given the continued growth in the working age population (up 20,000 people over the past quarter). This meant that, despite employment easing over the June quarter, the unemployment rate pushed down.
In addition to the decline in the unemployment rate, we saw a more general reduction in available labour market capacity. The underutilisation rate, which includes the unemployed and those who are looking to work more hours, also fell to its lowest level since 2008. This is consistent with the general tightening in the labour market as the economy has continued to expand.
Wage inflation still muted
While labour demand continued to strengthen, this has not yet translated into stronger nominal wage growth. The private sector Labour Cost Index rose 0.4% in the quarter, leaving annual inflation on this measure at 1.6% (in line with expectations). Similarly, the broader QES measure of average hourly earnings rose 1.2% over the past year.
While wage growth is currently subdued, it is expected to increase over the coming year, consistent with growth in economic activity and rising consumer price inflation. However, the extent of any wage increases may be modest for some time (with the notable exception of some workers in the health care sector, whose earnings will be boosted by the recent wage settlement agreement).
The New Zealand dollar fell 40pts to 0.7430 against the US dollar after the release, presumably in reaction to the surprise drop in employment.
Today’s result is unlikely to have a large impact on the RBNZ’s thinking ahead of next week’s Monetary Policy Statement. While there were mixed messages from the jobs figures, overall today’s data didn’t deliver major surprises. Looking at the jobs figures in conjunction with labour hours and today’s wage numbers, we’re still left with a picture of modest growth in activity but still subdued inflation pressures.
Employment fell by 0.2% over Q2, weaker than the 0.7% lift in employment forecast by both ourselves and the market. However, the unemployment rate edged down to 4.8%, as expected. The lower unemployment rate was the result of the labour force participation rate dipping – participation tends to follow the direction of employment to a degree.
The softness in employment growth is surprising, especially given employment indicators were robust over the quarter. Annual growth is, nevertheless, strong at 3.1% (and no longer distorted by the survey changes made last year). Wage growth remained modest over the quarter, in line with expectations.
This release reinforces the idea that the RBNZ will be in no rush to raise interest rates any time soon. We now expect the RBNZ will leave the OCR on hold until February 2019, previously November 2018.
Employment growth was weaker than expected in Q2, falling by 0.2% over the quarter. This was compared to ASB and the market’s consensus forecast for a 0.7% lift in employment and is in contrast to employment indicators such as the Quarterly Survey of Business Opinion.
However, jobs growth, as measured by the Quarterly Employment Survey, painted a more robust picture of the labour market. For example, the QES showed filled jobs lifted 0.9% over the quarter, with full-time equivalent employees lifting by a similar 0.8%. Overall, this suggests that the labour market may remain healthier than the headline employment growth rate in the HLFS indicates. Nevertheless, the weak HLFS employment growth follows 2 quarters of modest GDP growth, and raises a flag of caution.
Despite employment falling over the quarter, the unemployment rate continues to tick lower. The unemployment rate hit a recent low in Q2, falling to 4.8%. But the move lower instead reflects the fall in the labour force participation rate in Q2. After hitting a record high of 70.6% in Q1, the participation rate dipped back to 70.0% in Q2. The falling participation rate was seen across both male and female workers, as well as across most age groups. However, the lift in those taking themselves out of the labour force in Q2 was mainly women.
By region, Auckland continues to contribute the most to employment growth, followed by Waikato and Wellington. Looking at employment by industry, professional and support services employment lifted by 11.1% over the year, construction was up 8.3% and rental, hiring and real estate services jobs grew by 24.4%.
Wage growth over the quarter was largely in line with expectations with the Labour Cost Index showing another quarter of muted wage growth. In Q2, private sector ordinary time wages rose 0.4% over the quarter to be 1.6% higher than in Q2 2016. Public wages continue to rise the fastest on an annual basis, with wages 1.9% higher than this time last year. The QES wage measure, average hourly earnings, also rose in line with expectations, up 0.8% over the quarter. This is encouraging, especially as it comes after two weak quarters of wage growth.
· Weak employment growth (-0.2% q/q) masked a general tightening in the labour market in Q2.Employees are becoming harder to find.
· Spare resources continue to be absorbed. Both the unemployment rate and underutilisation rates fell to the lowest levels since Q4 2008.
· Wage growth remains subdued, though there were some tentative signs of a lift off lows in the quarter. We expect this to extend.
· The RBNZ will remain extremely comfortable with its ultra-neutral stance, though the labour market is the key area we expect to challenge the current dormant inflation picture.
· Demand for labour was soft in Q2 according to the HLFS. Employment contracted 0.2% q/q, which was well below consensus expectations. It is the first contraction in employment since Q3 2015. However, we feel this move should be heavily discounted. While one can easily make the case that it signals firms are finding it harder to fill vacancies, statistical noise will also be playing a role. It follows increases of 0.7% and 1.1% in Q1 and Q4 respectively. In the lock-up, Statistics NZ acknowledged that there could have been some under-coverage this quarter (without stating where that under-coverage was).
· Alternative measures of employment were far stronger. QES filled jobs rose a solid 1.0% q/q. Hours worked and hours paid lifted 1.0% q/q and 0.9% q/q respectively, providing a better signal for Q2 GDP growth. Even the composition of HLFS employment had a better “feel”, with full-time employment rising 0.7% q/q, contrasting with a 1.8% q/q plunge in part-time workers. Employment and hours worked across a number of measures are up around 3% on a year ago.
· But the surprise wasn’t limited to employment. The participation rate fell 0.6%pts to 70.0%, which is down from an all-time high in Q1. It meant that even with solid working-age population growth (+0.5% q/q), the labour force contracted by 0.2% q/q.
· The unemployment rate fell 0.1%pts to 4.8% – an 8½-year low. The underutilisation rate declined to 11.8% – also an 8½-year low. Both signal that despite the headline employment surprise, spare capacity in the labour market continues to be absorbed, albeit gradually.
· History would suggest that wage growth should be stronger by now. But it remains subdued, with our preferred measure – the private sector LCI – modest at +0.4% q/q (1.6% y/y). QES average hourly earnings were also modest at +0.8% q/q (1.2% y/y). Real wage growth remains negative.
· However, there were tentative signs of a lift in Q2. The LCI median private sector annual increase in the quarter was 2.5% – the strongest growth since Q2 2015. The unadjusted private sector LCI rose 0.9% q/q (3.1% y/y), which is the highest annual growth in a year. Public sector LCI wage growth also continues to outperform, rising 0.4% q/q (1.9% y/y), highlighting the risk of some private sector “catch-up”. We wouldn’t want to overstate things; the signs are only tentative. But we’d expect that as spare resources continue to be used up and the impact of the Government’s aged-care settlement flow through, wage growth should continue to lift modestly off lows, even if secular forces such as technology are acting in the opposite direction.
· What is also important to note is that overall labour income growth is still strong. Despite lacklustre wage growth, total gross earnings are still running at a strong pace, lifting 1.5% q/q (5.1% y/y) in Q2. That should be enough to continue to support healthy spending growth in the economy.
· The market (NZD) has taken the figures negatively. We think that is an overreaction. With workers increasingly difficult to find, labour demand will naturally slow. And eventually this will manifest in stronger wage growth.
The unemployment rate declined in the June quarter to 4.8% as we had expected - the lowest unemployment rate since late 2008. However, there were certainly some surprises in the detail of today's labour market report. Compared to our own and the markets' expectation of a respectable quarterly rise in employment, employment actually fell 0.2% or 4,000 in the quarter. The June quarter is the first since Statistics NZ redeveloped the Household Labour Force Survey (HLFS) that allows meaningful annual comparisons. On an annual basis employment growth came in at 3.1% yoy, on par with the gain recorded in total filled jobs in the accompanying Quarterly Employment Survey (QES) over the same period.
Looking a little more at the detail, a partial reversal in the volatile sell-employed category, which posted a 25,000 gain in Q1 and a 15,000 fall in Q2, was a major contributing factor to the June quarter fall in employment. The March quarter jump may have overstated the rise in employment at the start of 2017, and in comparison the number of filled jobs in the QES (which excludes sell-employed) averaged around 2.8% yoy over the first half of 2017.
An unexpected and sizable fall in the participation rate by 0.6%pts to 70% - the first fall in around 18 months - enabled the unemployment rate to fall at the same time as the number of people employed declined. A lower participation rate is at odds with the ongoing record levels of net migration, with many of those arriving ready to work. Statistics New Zealand did note that some underrepresentation of certain parts of NZ in the June survey may have played a role, albeit limited, in the lower participation rate.
Despite the weakness seen from lower employment and labour force participation, there were still some signs of further tightening in the labour market. In addition to the fall in the unemployment rate, the Household Labour Force Survey's (HLFS) labour underutilisation rate declined 0.5% pts to 11.8% - also the lowest rate since late 2008. Part of the reason for this may come in a shift form part-time to full-time roles. The number of full-time employees rose 0.7% qoq at the same time as the number of part-time employees dropped 1.8% qoq. In the QES there was a notable 0.9% qoq lift in total weakly paid hours, which were 3.5% higher than a year ago. But it looks as though firms are responding to the reported difficulty in finding staff by utilising their existing work force, with average weekly paid overtime hours - admittedly a volatile series - surging 10.8% in the quarter to be 12.3% higher compared to the same quarter last year.
Wage growth remains muted, with the Labour Cost Index (LCI) recording a 0.4% qoq rise to take annual increase in the LCI 1.7% yoy - the highest rise seen since early 2015. Private sector wage growth also recorded a 0.4% qoq rise - for the eighth consecutive quarter - leading to annual private sector wage growth edging higher to 1.6% yoy. With CPI inflation coming in at 1.7% yoy in the June quarter, household's real incomes are currently being squeezed. Moreover, with the ongoing capacity constraints facing certain sectors we expect to see wage growth pick up in coming quarters.
The weakness in employment growth and labour force participation further adds to recent softer data locally and suggests that the RBNZ is justified in keeping the OCR unchanged for an extended period. However, there was enough in today's labour market report to feel comfortable that the labour market will start to generate rising wage inflation in coming quarters. We still maintain our view that the RBNZ will keep the OCR unchanged until late 2018, but acknowledge that downside risks to our view have recently increased.
There was a sharp market response to this morning's labour market data. The NZ dollar, which was already drifting lower following events overnight, fell half a cent against the USD to around $0.7420 post release. Wholesale interest rates also fell following this morning's report, with the 2-year swap rate down to around 2.20%. More importantly, market pricing for a RBNZ rate hike has now moved out one month to September 2018.