Unemployment unexpectedly rises to 6.8% in June quarter from 6.7% in March; Number of employed falls by 2,000 vs expected rise of 7,000

By Alex Tarrant

The number of new jobs created in New Zealand over the past 15 months only just kept pace with growth in the working age population, meaning the unemployment rate remained elevated during the June quarter.

New Zealand’s unemployment rate unexpectedly rose in the June quarter from March by 0.1 percentage points to 6.8%, figures released by Statistics New Zealand show. A poll of economists by Reuters had given a median expectation that the rate would fall to 6.5%.

The New Zealand dollar fell from just under 81.60 US cents before the 10:45am release to just above 81.10 USc at 10:55am. By 11:20am it had recovered a touch to 81.20 USc.

The unemployment rate represents those in the labour force (unemployed plus employed) who are not in work, but actively seeking it. Figures showed 162,000 in this category in the June quarter, up by 2,000 people from March.

The 6.8% unemployment rate was the highest since the June 2010 quarter, Stats NZ figures showed.

Meanwhile, the number of people employed in the workforce fell by 2,000 to 2.227 million in the June quarter from March. The Reuters poll had pointed to a rise in employment of 7,000.

This saw the employment rate fall 0.3 percentage points to 63.8% of the working age population.

“This fall resulted from employment decreasing and the working age population continuing to grow (by 0.4% to 3.492 million),” Stats NZ said.

“Since the March 2011 quarter, the employment rate has remained around 63.9%. This indicates that employment growth is only keeping pace with the working-age population,” it said.

The slight rise in the unemployment rate reflected a small increase in both male and female unemployment, Stats NZ said.

“The small fall in employment and small rise in unemployment resulted in a flat labour force this quarter. However, the labour force participation rate decreased by 0.3 percentage points over the quarter, down to 68.4%, due to an increase in the working-age population,” Stats NZ said.

The number of people not in the labour force increased by 16,000 this quarter (up 1.4%) to 1.103 million. This reflected a rise in the number of men not in the labour force, Stats NZ said.

The figures, from the Household Labour Force Survey, are based on a representative sample of 15,000 households throughout New Zealand. Stats NZ says the survey is designed to produce reliable estimates of the numbers of people employed, unemployed, and not in the labour force.

Reactions

Westpac

Today's Household Labour Force Survey portrayed a labour market that continued to tread water at best. Unemployment ticked up, against expectations of a small drop. Employment fell, and hours worked were not particularly strong. And the labour force participation rate fell. This was a genuinely weak labour market report, and will serve as further confirmation that the economy is operating well below its capacity. The Reserve Bank will feel even more comfortable with its plan to leave the OCR at its current, stimulatory level for a long while. We continue to expect no change in the OCR until July 2013. 

The only redeeming feature of the data was the full-time/part-time split. Full-time employment was up 0.8%, while male part-time employment was down sharply. However, even this growth in full-time employment is little more than payback for an unusual decline in full-time employment over the second half of last year. 

The ex-Canterbury numbers were significantly stronger than the national numbers, but we suspect that this regional split is largely noise. Excluding Canterbury, employment growth was 0.8%, hours worked were up 1.7%, and the unemployment rate was 6.7%. This reflects the HLFS estimate of population growth in New Zealand ex-Canterbury, which was 1%. However, there is no corroborating evidence to support either a mass exodus from Canterbury or any other source of population surge in the rest of the country. Given that the HLFS has thrown up false signals on the regional population split before, we are not taking the regional numbers seriously. 

Market reaction

Markets usually react strongly to HLFS data, despite its volatile history, and today was no exception. Swap rates fell 6 basis points, and the New Zealand dollar was down approximately 0.4 cents against both the US dollar and the Australian dollar.

ASB

Overall employment was considerably weaker than expected, falling 0.1% versus market (and our own) expectations of a 0.4% increase.  That weakness was entirely driven by a 6.6% quarterly decline in Canterbury employment (our seasonally-adjusted estimate) after a very promising 5.1% lift in Q1.  We had been expecting further gains in Canterbury employment, given building consents and cement usage suggested further acceleration in earthquake reconstruction activity in the region.  Employment figures are often quite volatile even at a national level – let alone a regional level.  Nevertheless, we will be watching retail and construction data over the next month for indications of whether the rebuild is still picking up momentum or temporarily stalled.

In contrast, employment elsewhere in the country was slightly stronger than expected, up 0.8% qoq.  In addition, there was a surge in hours worked, up 1.7% over the quarter. However, that strength made up for a loss of momentum in the preceding 6 months.  While it is reassuring to see that ex-Canterbury employment has not lost momentum, the pace of recovery remains moderate, with annual employment growth of 1.6%.

The weaker overall national result was at odds with the Quarterly Employment Survey earlier this week, which had pointed to a healthy recovery in nationwide employment.  However, earlier surveys had suggested that employment demand remained subdued over the quarter.

Employment in construction industry was weak, consistent with the decline in Canterbury employment.  Over the past year, employment in construction was largely unchanged, with the HLFS measure declining 3% over Q2 (ASB seasonally-adjusted estimates).  This is in contrast to the QES survey, which showed a small pick up over Q2.  Nonetheless, the overall trend in both surveys is flat employment growth in the industry and suggests that economic stimulus from the Canterbury rebuild is yet to be evident in jobs.

Implications

We have pushed out our view of when we see the RBNZ first lifting the OCR to June 2013 from March 2013.  For the RBNZ to hike, future inflation concerns need to outweigh the ongoing risks posed by Europe’s never-ending crisis.  The weakness in overall employment growth and continued elevation of unemployment rate will reinforce that wage pressures will remain contained in the near future.  Moreover, uncertainty over the extent of Europe’s recession and the NZD’s resilience have been skewing the risks to a later start than March.  

However, we still see the RBNZ as underestimating future inflation pressures and the risks of the housing market heating up by more than it currently anticipates.   The risks around a June start seem balanced – an earlier start is conceivable if the global environment calms, housing heats up further and construction rises sharply.  We still expect the pace of OCR increases to be spaced out 3-monthly at each Monetary Policy Statement to an eventual peak of 4%.

JP Morgan (Australia)

New Zealand’s 2Q labour force survey was even worse than the March quarter result, with the unemployment rate edging up from 6.7% to 6.8% (J.P. Morgan 6.4%, consensus 6.5%). With the previous result having been biased by un-purged seasonal effects in participation, we expected a better result today, and the participation rate in fact fell even more than we expected, but this was offset by strong growth in the working age population. The economy failed to absorb that rise in potential labour. The burden was on the jobs data to significantly improve in 2Q, given the challenging seasonal factors for the quarter (to give a sense of how challenging, the unemployment rate nsa fell from 7.1% to 6.6%), but employment in fact contracted 0.1%q/q.

In terms of the detail, the weakness in hiring came through the agriculture sector, where annual employment growth fell further from -3.2%oya to -4.7%oya (the industry level data are not seasonally adjusted, hence the oya reference point), and manufacturing, where jobs growth faded from 5%oya to 1.8%oya (and -10.5%q/q). This reflects the persistent choker-hold that elevated NZD is placing on the traded sector. Construction employment also looked lackluster, which is in contrast to the message from yesterday’s firm level survey (as is today’s report overall – yesterday’s survey showed a rise in paid jobs of 0.7%q/q). Mining also had a soft quarter, but this is a small component of overall employment, so didn’t budge the overall metrics much. The news on broader utilization was mixed: hours worked increased 0.5%q/q, but the employment to population ratio slipped from 64.1% to 63.8%.

The weakness of the household labour force survey, in failing to recover from the seemingly temporary catalysts that drove 1Q’s slump, has come somewhat out of the blue. For one, it was not foreshadowed by the business survey data on hiring intentions and unemployment expectations, which have barely budged over the last year, and remain consistent with a jobless rate in the low 6s, rather than high 6s. Also, the firm level survey released earlier in the week flagged decent jobs growth in 2Q. Further, today’s result also runs contrary to the broader correlates of demand like monthly retail card spending, trade, and house prices, all of which have been better than average, and of course the surge in GDP recorded in 1Q. We had downplayed the GDP result, given that it didn’t match the broad pulse of the remaining data, and are inclined to do the same on the flipside with today’s result.

We think that will be the Reserve Bank’s approach too. Over the last few years, several high profile quarterly indicators have been subject to significant volatility. The levels and growth of real and nominal GDP for example have had very large revisions, and the retail volumes and unemployment rate numbers have posted 1%-pt-plus swings in both directions that were quickly reversed.

For all the action those swings have induced in market pricing over that time, the RBNZ has in fact been relatively inactive over this period, save for a 50bp cut following one of Canterbury’s earthquakes. Recent experience dictates that the Bank applies a healthy dose of skepticism to most of the data they receive, such that no individual indicators are given much weight in the Bank’s thinking. In fact, this was explicitly noted in the June MPS in discussing the recent GDP revisions. To put this in context, a downward revision of 2.3%-pts on 2011’s expenditure GDP, presumably a pretty important indicator, elicited the following response:

“The previous size of the disparity between the two measures (of GDP) injected unwelcome additional uncertainty into policymaking. However, the Bank uses a wide range of indicators in its assessment of the current economic outlook, given the inherent uncertainty of real time data, and neither measure of GDP is taken at face value in monetary policy deliberations. Consequently, these revisions have not materially affected the Bank’s judgment of inflationary pressures within the economy.”

We recognize though, that today’s numbers further remove the need for the RBNZ to be at all front-footed with the normalization of policy, and so the risks remain that the RBNZ is on hold until deeper in 2013 than our forecast assumes (a 25bp hike in March).

BNZ

This morning’s Household Labour Force Survey (HLFS) was more than just still very noisy. Its trends became disappointing in Q2 – with unemployment edging up, employment growth slowing, and participation coming off the boil. 

It wasn’t supposed to be this way. Today’s HLFS was supposed to shake off its mixed results of Q1, to affirm an improving trend, in keeping with what most other macro indicators have been saying regards the economy. Tuesday’s Quarterly Employment Survey was an upbeat case in point (and probably cause for the market to be on the lookout for a positive surprise in today’s statistics). 

Natural lags to the GDP cycle, a big soft spot in Canterbury, and severe jitters about the world economy at the time, seem explanations for today’s data disenchantments – but only in part. Overall, today’s HLFS should be pause for thought about how well the NZ economy is progressing. Even the increase in hours-worked in Q2 represented a lacklustre bounce-back from weakness over preceding quarters, for an annual fall of 0.4%. Not a great prelude for Q2 GDP. 

Of course, we’re still dealing with extremely noisy quarterly HLFS data. Just when we thought this issue was settling down, we were struck by how volatile the Q2 results had once again become, whether by way of industries, age-groups, gender, ethnicities or geographical regions. So to talk about these at length, in order to gain understanding and explanation seems a barren task. For every positive tendency there was a negative one waiting to spoil things. 

The most obvious, and curious, negative was a surprisingly soft result for Canterbury. This was at odds with other indicators, and anecdote, that suggest this region was starting to perk up, with the rest of the country simply plodding along. Today’s labour market report instead suggested things were progressing quite firmly outside of Canterbury, with Canterbury itself going backwards (compared to a year ago at least). For example, annual employment growth in Canterbury was estimated at -5.5%, while for the remainder of the nation was put at +1.6%. This was associated with a 5.1% fall in Canterbury’s working-age population and a 1.8% increase elsewhere, suggesting population shifts were more pronounced than many appreciated. 

Nonetheless, overall, we’re now starting with a bunch of HLFS numbers that are hardly pressing the Reserve Bank. While we don’t know what the RBNZ expected of today’s labour market report, we do know that in its June Monetary Policy Statement it forecast 2.6% employment growth over the year to March 2013, and a 5.5% unemployment rate by that stage. For comparison, we are now forecasting 1.4% growth in jobs over the period, and a jobless rate of 5.9% by March 2013. 

Sure, employment indicators from the recent business surveys suggest the RBNZ could yet have the better of it. However, it’s also true that business expectations have, like for GDP, over-predicted out-turns on employment for a while now. 

Today’s HLFS will thus go some way to keeping the RBNZ on the sidelines for the meantime. In this vein it will add to the frustrations of the arrogantly high NZ dollar. However, nor can we overlook the fact that wage inflation is already trend-like, and ever so slightly gaining momentum, even with these seemingly slack labour market conditions as registered by today’s HLFS. Another example of a slow economy, but with inflation risk nonetheless? 

And, speaking of inflation – on the basis of slow turnover – how can we ignore the heat that is starting to re-appear in house prices? This is threatening to reinflate over-valuation issues and, with it, the vulnerabilities these entail for the wider economy and financial system. Add in a pick-up in credit growth and the Bank will hardly feel comfortable in adding even more monetary juice via further reduction in the OCR. 

We also note that this afternoon’s ANZ Roy Morgan consumer confidence strengthened further, to 114.1, from 110.5 – hardly a sign that the household sector is falling by the wayside on the back of a stalling labour market. 

So, all things considered, we can see the RBNZ simply leaning towards further delay of the OCR hikes it forecasts. This does call into question the March point we’re picking for the first cash rate increase (as part of a very gradual uplift over the next 2-3 years). Might June be a better focal point? Today’s labour market trends certainly argue so. However, given their backward looking nature, and with much else to suggest NZ economic momentum, and inflation risk, remains in the pipeline, we prefer to buy a bit more time on the matter. 

ANZ

• Employment fell by 0.1 percent, to be just 0.6 percent higher over the last 12 months. The catalyst was a 3.4 percent fall in part-time employment, after a series of solid increases.  Full-time employment rose 0.8 percent to be just 0.3 percent up on a year earlier.
• There were significant regional and sector differences. Employment and hours worked somewhat perplexingly fell in Canterbury, with employment in the rest of the country rising 1.0 percent (+1.6 percent y/y). The sector details were mixed, with falls for manufacturing, construction and retail employment, but rises for private services.
• The unemployment rate edged higher to 6.8 from 6.7 percent, with the climb dampened by a fall in (volatile) labour force participation to 68.4 from 68.7 percent. Both the male (6.4 percent) and female (7.2 percent) unemployment rate rose 0.1 percent.
• Statistical noise surrounding the HLFS mean we are coy making sweeping assessments.  Suffice to say employment looks to be flatlining, in line with the trend in job ads. Excess capacity remains at the economy-wide level. 
• Timely indicators of labour market performance, including job ads, registered unemployment benefit figures, and employment intentions from business surveys, are providing mixed signals. We expect to see growing fragmentation of the labour market at the sector and, particularly, regional level across labour market outcomes.
• Despite a weaker than expected result, there is little in today’s data to challenge the patient “wait and see” stance from the RBNZ. The hurdle to OCR moves remains high.

Note: the data in this chart is 'actual' and not 'seasonally adjusted'.