Unemployment surprises, drops to 5.5%

15 June 2017

The growth in employment numbers forecast by various leading indicators seems to have finally appeared. Australia’s unemployment rate dropped in May and it was not because of a drop in the number of people counted in the labour force. The ABS released employment estimates which indicated Australia’s unemployment rate fell from 5.7% to 5.5% while the participation rate rose from 64.8% to 64.9%. The total number of people employed in Australia in either full-time or part-time work rose by 42,000 during the month, in contrast with the market’s expectation of +10,000. Total hours worked in May were 1.9% higher than April and 2.3% higher than a year ago.

For some years there have been concerns regarding the effect of the sampling process on labour force figures and these concerns are still present. According to NAB economist Tapas Strickland, “82% of [the] employment gains came from changes to the sample…” and he wonders whether there may be some reversal in next month’s figures. “[T]his could represent genuine improvement, but it also suggests some statistical payback is likely next month.”

Westpac economist Justin Smirk described the figures as a “solid” and he was impressed by some aspects of the report. “Further signs of the overall strength of this report was the 1.9% (over May) jump in hours worked taking the annual pace to 2.3% per year. This lift in hours worked was driven by a lift in both total employment and hours worked per person, 2.0% and 1.6% respectively.

However, he was surprised by the drop in the unemployment rate. “We had been looking for the unemployment rate to fall over the next few months but had not expected it to get to 5.5% so soon.” A glass half full approach would be to welcome the employment growth which produced such a result. A glass half empty approach would be to doubt the result. UBS economist George Tharenou was definitely in favour of the former approach. “Overall, employment remains very strong and clearly improved in recent months, with 2% year on year growth the best in over 2 years and now more consistent with the positive leading indicators. The unemployment rate has also surprisingly dropped to a cycle low of 5.5%. This supports the RBA’s positive outlook…and keeps rates on hold.”

3 year bond yields were essentially unchanged at 1.77% while 10 year yields fell 4bps to 2.40%. U.S. 10 year bond yields had fallen 9bps overnight and local yields were dragged down regardless of local news. However, any expectations of a rate cut in 2017 largely faded and the Aussie jumped from 75.90 U.S. cents to 76.25 U.S. cents in the minutes after the release as currency traders took the view the figures supported higher yields.