Month: August 2014

Continued slowdown in the labour market July 2014

The Australian labour force data for July points to a continued weakening in key labour market indicators. The very positive momentum of earlier this year has all but been erased. Employment growth is still better than this time last year, but growth has continued to slow over the last five months. This is not great news for the economy. One of the most important features of the labour market over the last forty-three months has been that employment growth remains well below that which is required to absorb growth in population. This has resulted in a lower participation rate, a higher proportion of PT employed persons and rising unemployment. The total number of unemployed persons remains elevated and is sitting well above GFC levels in terms of actual number and in terms of unemployment rate – yet we aren’t in a recessionary period. A significant and sustained turnaround in employment growth is required in order to turn this situation around. Two important leading indicators of employment growth suggest at least more of the same growth over the next few months. It’s hard to imagine how this situation won’t have an impact on demand, but so far, economic growth is holding up.

Note that all data used here is trend data unless otherwise stated.

National Summary

The National summary provides some mixed highlights:-

Source: ABS

In the most recent month – July v June – the slow-down in employment growth is evident with growth in total employed persons (+4.5k persons) lower than growth in total unemployed persons (+9.4k persons).

The data has been more positive over the last 6 months with FT employment growth the major driver of total employed persons. The return of FT employment growth over the last six months has been a welcome sign in the labour market.

The chart below tracks the month on month changes in total employed, unemployed and changes in the labour force due to participation rate changes. The sum of the last twelve monthly changes equals the annual change, so it provides a more insightful view of which way the indicators are heading underneath the annual and six monthly numbers.

The underlying change in trend over the last five months is obvious:-

Source ABS

Growth in total employed persons has slowed considerably since the Feb 2014 peak and the growth in total unemployed persons has accelerated in that time.

Despite the recent increase in total unemployed persons, the Labour Force Participation Rate (LFPR) has been steady during this time. This represents a big reversal of recent trends. Compare July 2013 – total unemployed grew by 2.7k persons, but the change in the labour force due to the declining participation rate was -12.5k persons (leaving the labour force). Fast forward to July 2014. The total number of unemployed persons grew by 9.5k and the change in the labour force due to an increase in the participation rate was 600 persons. My point is that unemployment is still growing, but people are no longer leaving the labour force (as a response?) and its is unclear what is driving this change in behaviour.

Total Employed Persons

The monthly growth in total employed persons in July was driven by growth in FT employed persons of +6.3k versus -1.8k decline in PT employed persons. Higher growth in FT employed persons (versus PT employed) is usually a very positive sign (more demand, higher incomes etc) but the trend of that growth is concerning – the monthly growth in FT employed persons is slowing down, not increasing (blue trend line below).

Source: ABS

At the same time, growth in PT employed persons is now negative (month on month). Both measures of employment growth are slowing down.

There is also a concerning trend developing in the gender-based view of employment growth.

Whilst total employed persons grew by +4.556k persons, total employed males declined by -1.49k and total employed females grew by +6.046k. Growth in PT employed males has declined month on month over last 5 months and at the same time growth in FT employed males has slowed from a high of +9.8k persons in March to +4.1k persons in July. But it must be noted that growth in FT employed males is higher than it was a year ago.

At the same time, there has been a significant acceleration in the growth of unemployed males and no change in male participation.

Source: ABS

Taking a more long term view, current annual employment growth remains below historical growth benchmarks.

Source: ABS

The ten year average growth in total employed persons for July is +209k persons. The annual growth at July 2014 is currently half that at +110k. Its growth in FT employed persons that is mostly driving this trend. The ten year average growth in FT employed persons is +133k persons and the current annual rate of growth in FT employed persons is +59k – well below half the historical rate.

As a result, the proportion of PT employed persons in the labour market is close to historical highs at 30.3% of those employed are PT employed. This growth in PT employment, starting since the GFC, has undoubtedly saved the unemployment numbers from looking far worse. The all-time high in the proportion of PT employed persons of 30.46% was only reached in January 2014.

Another way to benchmark employment growth is to compare it with the growth in working age population. You could argue that this is the measure that matters the most – is employment growing fast enough to absorb what population growth is adding to the labour force? The short answer is ‘no’.

Ideally the economy should be adding at least enough jobs to match population growth. If the difference is negative, then that difference, people, either become unemployed or leave the labour force (reduction in participation rate). The chart below highlights that over the last forty-three months, employment growth has been lower than what population has been adding to the labour force. This isn’t the only period in our recent history where this has happened, but it is the most prolonged so far:-

Source: ABS

As of July 2014, annual population growth added approx. 214k persons to the labour market, yet total employment only grew by +110k. This left an approx shortfall of 104k persons during this last year. Of this group, 39k left the labour force and total unemployed persons grew by +65k.

As mentioned, this is not a recent trend, as highlighted by the circled area in the chart. This is forty-three consecutive months where employment growth has been lower than population growth that’s been added to the labour force, leaving 331.914k persons either unemployed (+165k persons) or exiting the labour market (-166k persons).

Let’s put that into some context by comparing this current period to other similar periods where employment growth has been lower than what population growth has added to the labour force.


# Consecutive Months

Total Shortfall of Jobs to Population added to the LF

# Left Labour Force (net chg)

Change to Total Unemployed Persons

Recession 80’s – Jul 81 – Jun 83



84k persons

+338k persons

Recession 90’s – Jun 90 – Jun 93



213k persons

+381k persons

GFC 2008 May 08 – Sept 09



40k persons

+188k persons

Current period – Jan 11 – July 14 and counting



166k persons

+165k persons

Source: ABS

The current shortfall is by far, the longest period recorded – forty-three months, but it’s not the most severe in terms of total shortfall. What makes this current period different to the other three highlighted in the table is that this is not related to a recessionary period or event. As a result, unemployment growth has been lower than in any of the other periods, but this has been the second strongest in terms of the fall in labour force participation.

One potential reason for the decline in participation is the ageing population. As workers now move into older age groups, the participation rate will naturally decrease as older workers generally have a lower participation rate – but the assumption is that as older workers move into older age groups, their participation decreases (via retirement). The evidence suggests that whilst the population share of older age groups has increased, so has their participation.

This still doesn’t explain why growth in employment has been well below trend and below what is required to absorb population growth in the labour market. If the effect was purely one of demographic change, it’s not likely that we’d see a corresponding increase in total unemployed persons.

Forward Indicators of Employment Growth

What do some of the forward indicators say about what to expect in employment growth into the near future? The ANZ Job Ad series provides some insight. There is a similar pattern here – there was an improvement in the number of jobs in the latter part of 2013 and a slow down since early 2014.

Source: ANZ (b) The trend estimates have been derived by applying a 13-term Henderson moving average to the seasonally adjusted series. This smoothing technique enables estimates to be produced for the latest month, but it also results in revisions to the most recent six months as additional observations become available.

The slow-down in the monthly rate of growth in job ads suggests that employment growth will remain low over the next few months.

The other indicator of what might be ahead for employment growth is hours worked. There is a fairly positive trend in place with regard to growth in FT hours worked in the economy (blue line in the chart below):-

Source: ABS

Here we are starting to see an acceleration in FT hours worked. There is some suggestion that growth in hours leads growth in employment – those working on PT hours increasingly shifting to FT hours where there is demand. This may result in a continued shift from growth in PT to growth in FT employed persons over the next few months.

Total Unemployed Persons

The monthly growth in unemployed persons saw a large jump in July, driven by an acceleration in growth of total male unemployed persons.

Source: ABS

Over the last four months, growth in total unemployed males has been accelerating – male unemployment is now growing at numbers not seen since the GFC.

The longer term averages also show that growth in total unemployed persons is historically high. The ten year average increase in unemployed persons at July is +9.6k persons. The current annual rate of growth at July 2014 is +65k persons. The total number of unemployed persons now exceeds the highs reached in the GFC and the unemployment rate continues to edge up.

Source: ABS

Labour Force Participation

Given the change in the LFPR, the unemployment rate doesn’t really provide the most accurate view of total unemployment in the economy. The current unemployment rate is 6.13%. As alluded to earlier, a relatively large number of persons have left the labour force over the last forty-three months. What is unknown, is the proportion of those that have left the labour force that would be deemed as ‘discouraged’ workers. Over the last forty-three months, I’ve estimated that over 166k persons have left the labour force (for various reasons). In that time the LFPR has declined from an all-time high of 65.65% in Dec 2010 to 64.74% at July 2014. Lower male participation has been the key driver of this trend.

Source: ABS

A declining participation rate may tend to understate the unemployment rate because, if discouraged workers (those that can’t find employment) are leaving the workforce, then they don’t get counted as ‘unemployed’.

The quite large declines in the LFPR of a year ago have stabilized over 2014.

Source: ABS

This has been driven mostly by an increase in female participation during this time. But the month of July was the first month that male participation increased in twenty months (+120 male persons in July v June ’14). This is a fairly significant turnaround from a year ago where both male and females were leaving the labour force. Instead now, we are seeing higher growth in unemployment and a more stable participation rate. It’s unclear what is driving this shift in behaviour – a positive or a negative sentiment? To answer that without any robust data is mere speculation. The trend in participation has switched nonetheless and as long as employment growth stays relatively low and unemployment continues to grow, a more negative view of the labour market will remain in place.










Growth in New Credit Continues to Accelerate in June 2014

Growth in new private sector credit has been accelerating for a year now. The largest component, housing, has gained most of the attention. But the more hidden star of the show has been the acceleration in growth of new credit for business. It’s an important point to focus on because it should be positive news regarding the Australian economy. Credit growth for business should lead to increased capital investment and all the benefits that come along with that – income, employment and economic growth. Yet private sector capex growth has not been a strong performer over the last few quarters, mostly due to the slowdown in growth of mining capex. The main question of this post, is whether this acceleration in the growth in new credit for business has, or will, likely end up driving growth in business investment – especially non-mining investment. Given the forward estimates for total capex (ex housing) in the 2014/15 financial year are still well below current levels, the answer is probably not to the degree needed at this stage.

The other important highlight in the June data is the reversal in the size of new credit growth between investor and owner occupier mortgages. The change was surprisingly large and, if it continues, highlights a potential shift in sentiment in the housing market. The overall continued acceleration of growth in new mortgage credit is likely to feed into ongoing house price growth.

Some clarification is required first. On this blog, I maintain a ‘credit impulse’ page which looks at the growth in new credit as a % of GDP. Growth in credit/debt is one of the major themes driving the Australian economy, along with mining and housing, so the tracking of the credit impulse is a useful indicator of activity in the economy. The data for this post and the credit impulse calculations are sourced from the same data – the stock of outstanding credit (RBA D02). As GDP is released quarterly, the credit impulse tracker is only updated at that time. In between these times, the ‘growth in new credit’ is used to gauge activity in the economy. The growth in new credit looks at second order changes or acceleration in credit growth in dollar terms. Read more here.

There are two significant highlights in the release of the June data by the RBA.

The first is the continued acceleration of growth in new credit for the business component of total private sector credit.

Chart 1

Source: RBA

The growth in new credit for business is now, for the first time in well over 18 months, one of the larger contributors to the overall growth in new private sector credit.

The growth in new credit for business could be an early indication that business is now willing to take on new debt to invest and/or expand. This is generally good news for economic growth. But it’s important to consider what this growth in new credit is being used for and which sectors are driving the growth in new credit in order to ascertain its potential impact on the economy.

As an aside, I generally place greater value on growth in business debt leading to productive capital investment than growth in debt for housing. Growth in new credit for housing does not tend to have the same impact on the economy where the majority of that credit growth is used to just transfer existing assets within the private sector for higher and higher prices. This type of credit growth potentially takes away from more productive forms of investment usually undertaken by business.

The stock of total outstanding credit for business is now only 2% below the peak reached pre-GFC in November 2008. The growth over the last 12 months (especially) is evident, as is the large increase in June 2014.

Chart 2

Source: RBA

The important assumption above is that this credit growth will lead to some form of productive business investment and/or expansion. This is usually part of the transmission mechanism that central banks rely upon when implementing a lower interest rate policy. But, despite the acceleration in growth in new credit for business over the last year, private capital expenditure growth has been poor of late.

Looking at the Mar ’14 GDP results, Private Gross Fixed Capital Formation (GFCF) made a -0.09% pt contribution to annual GDP growth of +3.53%. Breaking Private GFCF down into its component parts reveals the split between a negative contribution from Total Business Investment and a positive contribution from Dwellings & Ownership Transfer costs. This is consistent with the larger contribution from mortgage credit growth than business credit growth in the year leading up to the March quarter.

Chart 3

Source: ABS

The dwellings component is made up of ‘new & used dwellings’ most of which is new dwelling construction but also includes new additions and/or alterations to existing private dwellings. ‘Ownership transfer’ costs relate to all ownership transfer costs, not just for dwellings.

The main drivers of the negative contribution for Total Business Investment was non-dwelling construction and machinery & equipment, together contributing -0.67%pts to the decline in the Total Business Investment component. The Total Business Investment component has made a negative contribution to overall GDP growth for the last three (3) quarters and at a similar rate.

So will this current acceleration in the growth in new credit for business likely feed into growth in business investment? First consider which sectors have been driving this growth in new credit for business.

The RBA series – Bank Lending to Business – Total Credit Outstanding by Size & Sector (D7.3) provides some insight as to which sectors have been driving this growth in new credit for business over the last year. Note that the most recent data is only up until March 2014.

Over the last year, the single largest contributor to the growth in new credit for business was from the Finance & Insurance sector.

Chart 4

Source: RBA

Looking at the trend in the growth of new credit for business by major sector provides a further layer of insight. I’ve split the major sectors into two charts given the relative size of the dollar growth in new credit:-

A) The two largest sectors by share of total credit outstanding are Other (48%) and the Finance & Insurance sector (16%).

Chart 5

Source: RBA

The annual growth in new credit for Finance & Insurance has accelerated to $16b as of Mar 2014 – with the trend over the last 3 quarters to Mar ’14 clearly positive. Despite being the larger share of total bank lending to business outstanding, the growth in new credit for ‘Other’ remains negative and the upward trend no longer in place. Both are well below their recent highs which will likely have implications for the relative impact in the economy.

The question that this raises though, is to what degree will bank lending to the Finance & Insurance sector will lead to growth in capital investment? Finance and Insurance are service based industries, so large capital projects for these firms are likely to be IT or real estate based. According to the latest ABS capex survey (in current dollars), actual annual capex expenditure in the Finance & Insurance sector declined by 6.3% and the sector only accounts for a small proportion of the value of capex in the survey. More likely, this growth in new credit could find its way into the economy through these firms carrying out their core business of providing funding. Whether this ends up funding further housing speculation or more productive business investment remains to be seen.

B) The other major sectors of Agriculture, Mining, Manufacturing, Construction and Wholesale, Retail and Transport account for 36% of total outstanding credit of bank lending to business.

The size of the growth in new credit among these sectors is clearly much smaller than Finance & Insurance (again will have implications for the level of impact in the economy), but the important point to note is the recent acceleration of growth in new credit across most sectors. The direction is important, but the relative size of the growth is still small (which is why the credit impulse is so useful, as it expresses this growth as a % of GDP).

Chart 6

Source: RBA

The important point from this is to see whether this growth in new credit starts to show up in capex in these sectors. Given the continued acceleration of growth in new credit for the business sector (highlighted in chart 1, RBA D.02) between March and June 2014, there may be some upside surprise in private GFCF in the next few quarters GDP.

Looking at the Expected Capex survey from the ABS for March 2014, the small improvements in expected capital expenditure for manufacturing and ‘other selected industries’ are overshadowed by the sheer scale of the slow-down in mining.

Chart 7 – Total Capital Expenditure – actual and expected

Source: ABS 5625 – this survey isn’t a comprehensive over view of capex across all industry sectors – the ‘other selected industries’ does not include agriculture, forestry and fishing, education, and health and community services industries and capital expenditure on dwellings by households.

Firstly, looking at the remainder of the 2013/14 year above. Note that estimate 6 comprises actuals to March and estimates for the June qtr of the 13/14 financial year.

Total capital expenditure at estimate 6 represented a -2.5% decline on the previous estimate 5 at Dec 2013. The largest component of that decline was mining $-7,294m. At the same time manufacturing capex increased by 6.2% or $558m and ‘other selected industries also grew by 4.4% or $2,461m – was this growth driven by the recent growth in new credit? But the growth in capex in both these sectors was clearly overshadowed by the slow-down in mining. The upshot is that significant capex increases (and presumably credit) would be required by industries ex-mining in order to ‘re-balance’ growth as mining capex slows.

Looking further out to 2014/15, estimate 2 for total capital expenditure is set to decline by 15% from where estimate 6 currently stands. The biggest contributor to that decline is mining at -16% or -$15,418m. There is no evidence here to suggest that other sectors will be picking up the slack. For example, capital expenditure in manufacturing at estimate 2 for 2014/15 year is 29% or -$2,788m below where estimate 6 currently sits for the 2013/14 financial year. Other selected industries is similar, sitting at -13% or -$7,581m for the 2014/15 financial year.

The next capex survey for the June 2014 qtr is due for release by the ABS on 28th August 2014 (ABS 5625 Private New Capital Expenditure and Expected Expenditure) and this may shed some more light on whether this recent acceleration in credit growth between March and June has fed into incremental capital expenditure for the remainder of 2013/14 financial year.

Another more up to date indicator of potential capital expenditure is the import of capital goods (ABS 5368.08 – I’ve used trend data here in order to provide a guide on direction). The import of capital goods has declined by 5.5% year on year at June 2014 compared to an increase of 7.9% on the import of consumption goods. The month on month growth in import of capital goods suggests only a slight improvement via a slower rate of decline in the three months leading up to June 2014. In fact, the import of intermediate goods highlights that ‘other parts for capital goods’ has grown annually at over 6%, but the recent month on month data points to decline over the last five months.

The second highlight of the RBA June data was the dramatic shift in the size of the growth in new credit from investor to owner occupier mortgages.

Growth in new credit for housing investor mortgages has been the largest component of growth in total new private credit over the last year, despite the size of outstanding credit being half that for owner occupier activity. But in June, this trend reversed sharply, with growth in new credit for owner occupier mortgages increasing sharply;-

Chart 8

Source: RBA

Given that this has happened in one month, it’s unclear as to whether this is the start of a new trend. But if it is, it marks the start of a change in sentiment. Investor activity has been the key driver behind growth in housing debt and therefore house prices during this current interest rate easing cycle. It appears that owner occupiers were much slower to take advantage of lower interest rates to increase their debt load. Recently, several of the bigger banks have suggested that owner occupiers have used this opportunity to pay down mortgage debt at a faster rate. Full article here (source: SMH 27 July 2014). The data I use here is the stock of outstanding credit (the difference between monthly totals represents the addition of new debt to existing debt, less all debt that is paid down in the period), so a sudden increase in new credit growth could indicate that 1) owner occupier mortgages are now growing faster than households are paying down incremental mortgage debt or 2) that owner occupier households have slowed their faster rate of mortgage pay-down for some reason.

The growth in new credit for owner occupier mortgages only turned positive in May 2014, so the large increase in the June data is surprising. I will delve further into this issue in another post looking at the growth in housing finance and house prices in Australia.

It’s worthwhile pointing out that the growth in new credit for all mortgages is now higher than the pre GFC peak. This was not the case for growth in new business credit.

Chart 9

Source: RBA

Given the data shows the second order change, it means mortgage credit growth continues to accelerate in Australia. This ongoing acceleration suggests that house prices will, on aggregate, also continue to rise in the near term.