NZ unemployment rate falls to 6.4% in Sept qtr from 6.9% in June; lower than expected

By Alex Tarrant

New Zealand’s unemployment rate fell by more than expected to 6.4% in the September quarter from an upwardly revised 6.9% in the June quarter, Statistics New Zealand said today.

Economist expectations had centred around an unemployment rate of 6.7% for the September quarter, and the bigger than expected fall saw the New Zealand dollar rise from 77.8 USc to 78.5 USc shortly after the announcement. This is its highest level since June 2008. The NZ dollar had already been boosted overnight by the QE2 announcement from the US Federal Reserve.

Longer term wholesale interest rates also rose around 5-10 basis points as some market players lifted their expectations of future rises in the Official Cash Rate by the Reserve Bank of New Zealand. Economists, however, still see the next OCR as likely to be on March 10 next year.

ASB economist Jane Turner said both the September quarter employment growth and unemployment rate suggested the economy performed better than expected during the quarter.

"Attempting to look through the volatility [in unemployment figures through the year], the trend in the labour market appears to be gradual improvement, which is to be expected given the nature of the recovery and more appropriately fits with anecdotes," Turner said.

She said ASB still expected the Reserve Bank of New Zealand to hold the Official Cash Rate at 3% until March 2011, seeing as the headline figure was still higher than the central bank's expected 6.2% unemployment rate for the quarter.

The fall in the headline figure was due to a large fall in male unemployment, which fell from 6.9% in the June quarter (originally 6.8%) to 5.7% in September, Stats NZ said.

This was offset by a rise in female unemployment, from 6.8% to 7.2% over the quarter.

The gap between the male and female unemployment rates was the biggest since the series began in 1986, Stats NZ said.

The fall in unemployment came as the labour force expanded over the quarter by 0.6%, or 13,000 people to 2.344 million, or 68.3% of the working age population of 3.43 million. The participation rate rose to 68.3% from 68.1%.

There were 1.089 million working age people not in the labour force.

The number of employed people rose 1%, or 23,000, to 2.193 million over the quarter, Stats NZ said. The rise was dominated by an increase of 13,000 in part-time employment.

The number of unemployed in the labour force fell 6.1%, or 10,000 to 150,000.

The unemployment rate of 6.4% in the September quarter was down slightly from 6.5% the same quarter a year ago.

Despite the fall in headline unemployment over the quarter, the number of people who said they were under-employed rose in September from June.

Under-employment is a measure of part-time workers who wish to work more hours, and may serve as a measure of labour under-utilisation in the economy.

Of the 503,700 people employed part time in the September 2010 quarter, 21.8% (110,000) would prefer to work more hours, Stats NZ said.

This compared to 20.6% in the June quarter, but was down from 24.4% in September 2009.

Random oscillation, recovery a slow grind

JP Morgan economist Ben Jarman said the New Zealand unemployment figures continued to oscillate in a seemingly random fashion, though the underlying signal in the data seemed to be one of gradual improvement.

"The temptation, given the recent history of the labour report, and the swathe of other recent disappointing Kiwi data, is therefore to view these numbers with a raised eyebrow. But while the magnitudes of the moves in the unemployment rate have almost surely been exaggerated, the lack of a compelling trend does seem to fit with a recovery from a deep, prolonged recession that has been repeatedly punctured by households’ efforts to delever," Jarman said.

"The implications of today’s result for the near-term policy outlook boil down to judging how fine the RBNZ’s data sieve is. Our position is that today’s data were a pleasant surprise, but that, through the noise, the trend is one of slow, gradual improvement that has always been frail. The lesson we gain from the experience of the North Atlantic economies is that it is difficult to delever in an environment of soft growth," he said.

"We therefore expect the recovery to be a slow grind, though today’s numbers show that the economy may be getting a little more traction after a prolonged period with interest rates at extremely low levels. This favours a softly, gently approach from policymakers."

Jobs market strength

Employment agency Momentum said it was seeing an underlying improvement in the jobs market

“These numbers have been reflective of what we have been experiencing in the Auckland market," said Momentum's Auckland General Manager Howard Ross.

"Contracting in the last 2 months has increased quite rapidly as organisations determine whether they need a permanent resource or just to meet a short term need," Ross said.

"From a permanent perspective we are starting to see a stronger pickup in high quality work from our clients as they realise if they don’t appoint before Xmas then their growth plans for next year will be held back," he said.

Higher OCR next year?

BNZ economist Doug Steel said the figures showed a recovery was under way. Here are his comments.

This confirms New Zealand’s labour market is clearly in recovery mode. We caution about being too precise about the magnitudes and getting too carried away with one positive quarterly figure given the bumpiness in the data, which makes it difficult to decipher any signal from noise. But looking through the ups and downs in the data, it appears that the labour market has been slowly improving, on trend, since about the start of the year.

It is in this context that it was not surprising to see some underlying rise in wages starting to filter through in Tuesday’s vast array of wage data. This will have the RBNZ on alert. But it is important to recognise no more on alert than it already is. today’s data is unlikely to materially alter the RBNZ’s forecasts.

We certainly do not think it will cause anything like the major RBNZ forecast revision that the big Q1 drop in unemployment did, and the very hawkish June MPS that followed. Rather, the RBNZ are likely to take this survey as confirmation that the recovery remains on track (as we do) and that capacity is being soaked up at about the rate it thought it would.

As such it will probably firm up the Bank’s thinking from the October review, and the forecasts published in the September MPS that implied the next OCR hike coming in Q1. To us, March remains the most likely date to restart the tightening cycle with the risks shifting to earlier rather than later.

More important that the precise timing of the next hike, as we have pointed out many times before, is that interest rates are likely to push significantly higher through 2011 assuming the economic recovery continues as we think it will.  

Westpac economists Brendan O'Donovan and Dominick Stephens said the data showed unemployment was past its peak and falling, despite some volatility in the figures.

Here are their comments.

Another way to cut through volatility is to look directly at the rate of joblessness rather than the official unemployment rate. This has fallen from a peak of 11.8% to 10.8%. Joblessness counts everybody who is either available for work or actively seeking work.

By contrast, people are only counted as unemployed if they are both available and actively seeking. People searching only via the internet or in newspapers are not counted as "actively seeking", and nor are people conducting full search but not available to start immediately. Instead, these people are counted as not in the labour force (NILF).

Trouble is, it seems that large numbers of people are to-ing and fro-ing across the blurry border between unemployment and NILF, creating artificial volatility in the unemployment rate. As an aside, it is worth noting that by not counting people who search for jobs only via the internet, we may be systematically understating the unemployment rate relative to the rates reported in the 1990s, when internet search was uncommon.

News that unemployment is above-average but falling was no surprise to us - surveys and benefit payments had already signalled as much. At most, the labour market may be slightly tighter than we expected. Our overall economic forecasts will change little in light of this data. We still think New Zealand is on a path towards economic recovery, although the pace of growth slowed through mid-2010.

The Reserve Bank is likely to feel the same way about the HLFS. In its September Monetary Policy Statement, the Bank was at pains to emphasise that it now treats the HLFS as just one piece of a broader mosaic of labour market information. The reported unemployment rate was consistent with other parts of the tableau, so the RBNZ is unlikely to be greatly moved by this data.

That said, the possibility that last quarter's jump in unemployment was a sign of much worse to come was being seriously entertained by financial markets before this data came out. That possibility has now been priced out, so there was quite a large "confirmation" move when the data printed. The exchange rate rose a whole cent, and two year swap rates rose 9 basis points.

Markets are now pricing in more OCR hikes than the RBNZ signalled at the September Monetary Policy Statement. And fair enough too - we expect the RBNZ will deliver even more OCR hikes than markets are pricing. Markets are most likely to take swap rates even higher in coming weeks, as more data confirming the economic recovery rolls in.  

Here are Jane Turner's comments:

Both employment growth and unemployment rate suggest the economy has performed better than expected over Q3.  However, to some degree today’s results were likely to be somewhat discounted by both the market and the RBNZ, given the unusual amount of volatility in the survey over the past year.

Indeed, earlier this year, market’s (and our own) confidence in the economic recovery was buoyed by a surprising drop in unemployment, only to be reversed the following quarter.  

Nonetheless, attempting to look through the volatility, the trend in the labour market appears to be gradual improvement, which is to be expected given the nature of the recovery and more appropriately fits with anecdotes.  

In addition, today’s result provides a better fit with Tuesday’s stronger than expected wage outturn.

Overall, the continued improvement in labour market will start to feed through to stronger wage growth over the next year, and will underpin a recovery in consumer confidence. 

The employment, filled jobs and hours worked figures released this week reinforce that some economic growth occurred over Q3, notwithstanding the impact of the earthquake.

The unemployment rate, while lower than market expectations, was still higher than the RBNZ’s optimistic forecast of 6.2%.  

Nonetheless, the general improvement in employment growth is likely to have been close to the RBNZ’s broader expectations for the economy in Q3.  

On balance, the flow of data over recent months has been marginally weaker than expected.  However, the RBNZ is likely to remain comfortable with the medium-term outlook. 

We continue to expect the RBNZ will keep the OCR on hold until March next year.

(Updates with JP Morgan comments, Momentum comments, Westpac comments, BNZ comments, ASB economist comments, chart)

The charts below are for unadjusted figures: