Business

May employment surges as jobless rate holds at 48-year low

Bond futures are fully priced for another half-point lift to the RBA’s 0.85 per cent cash rate in July and a 12 per cent chance of a 0.75 percentage point increase. Markets are pricing in a cash rate of 1.9 per cent for August.

Three-year bond yields shot up 16 basis points to 3.8 per cent after the jobs report. They steadied at 3.7 per cent, having gained 7 basis points in the session. The 10-year rate also rose 7 basis points to 4.1 per cent.

KPMG chief economist Brendan Rynne said the underlying strength of the economy was dragging additional workers into the labor market, with the participation rate increasing by 0.3 percentage points to a record 66.7 per cent in May.

The increase in participation meant the unemployment rate held steady at a 48-year low of 3.9 per cent instead of falling further.

“The key question now is whether the labor market strength is going to be maintained in this upcoming period of higher interest rates, higher labor costs and higher inflation,” Dr Rynne said.

The Reserve Bank expects the unemployment rate to fall to 3.7 per cent by the end of the year.

JP Morgan economist Tom Kennedy said participation gains were particularly strong among young workers, with the share of people aged 15 to 24 either in a job or seeking employment reaching a multi-decade high of 71.9 per cent.

The participation rate for women increased to 62.3 per cent in May, just shy of recent record highs.

ABS head of labor statistics Bjorn Jarvis said it was the seventh consecutive monthly increase in employment.

“Average employment growth over the past three months (30,000) continues to be stronger than the pre-pandemic trend of around 20,000 people per month,” Mr Jarvis said.

“In addition to the continuing trend of increasing employment, we have continued to see relatively stronger growth in hours worked. This is something we also saw this time last year, before the delta outbreak.”

Participation in the workforce surged in May. Steven Siewert

RBA poised to lift rates

AMP Capital chief economist Shane Oliver said the strong jobs report meant the RBA was on track to raise rates by 50 basis points again in July.

“We continue to see the peak in the cash rate being around 2.5 per cent, but it could come earlier given the RBA’s shift towards a more aggressive approach,” Mr Oliver said.

National Australia Bank director of markets and economics Tapas Strickland said the jobs numbers deserved back-to-back 50 basis point rate increases.

“There is nothing in this report to dissuade the RBA from raising rates by another 50 basis points in July and August, as is NAB’s view, as it continues to reveal a tight labor market and interest rates remain well below the RBA’s nominated 2.5 per cent neutral rate,” he said.

RBC Capital Markets revised its rates forecast after the release of the jobs numbers to include three 50 basis point rate rises in July, August and September, at which point the cash rate target would be 2.35 per cent.

“Risks remain skewed to the upside, and we suspect that RBA itself currently thinks it will need to hike into unequivocally restrictive territory, 3 to 4 per cent cash [rate]to restrain inflation.

“Our thesis, however, is that a deteriorating consumer will prevent the RBA hiking any further in the back end of 2022,” RBC analysts said.

Economists say the Fair Work Commission’s minimum wage ruling on Wednesday could quickly flow on to the bulk of the workforce on enterprise agreements due to more deals up for negotiation, putting additional pressure on the RBA to raise rates.

Morgan Stanley economist Chris Read said the decision to introduce 4.6 per cent to 5.2 per cent increases for minimum wages would have a benchmark effect for broader wage expectations and negotiations.

“There are about 40 per cent of workers on agreements and these agreements lock in wage growth rates for several years, which would usually imply a relatively gradual rate of aggregate wage growth change,” Mr Read said.

“However, data suggest a greater degree of stale currently being renegotiated, which could mean a faster pass-through (and lock-in agreements) of higher wage outcomes.”

Citing persistent wage growth as an “important driver” of its forecasts, Morgan Stanley now expects inflation to reach 7.4 per cent by the end of the year and for the RBA to deliver 50 basis point rate hikes in both July and August.

Underutilization hits 40-year low

In a further sign of strength, the underemployment rate fell by 0.4 percentage points to 5.7 per cent. It means the underutilization rate, which includes both unemployed and underemployed people, fell to 9.6 per cent, its lowest level since April 1982.

Commonwealth Bank economist Belinda Allen said the fall in underemployment was the “standout feature” of the May numbers.

“The fall has been remarkable and reinforces both the demand for labor but also the labor supply constraints in Australia since the pandemic,” Ms Allen said.

In research released on Thursday, RBA economists Susan Black and Emma Chow said the tight jobs market was encouraging more workers to switch jobs, particularly in high-skilled roles where demand for labor was strong.

“Workers remain upbeat about the jobs outlook, with the share of workers expecting to change jobs/seek other employment within the next year being around its highest level since 2008,” Ms Black and Ms Chow wrote.

Economists expect the pace of jobs growth to slow in the period ahead, amid a dwindling pool of unemployed people available to take up jobs. The number of unemployed people increased modestly to 548,100 in May, but is 22.1 per cent lower over the year.

The strong increase in employment comes amid ongoing growth in job vacancies, as businesses struggle to find enough workers to meet a boom in domestic demand.

There were a record 423,500 job vacancies in February, equating to 3 per cent of the labor force.

Spending appears to have held up in May, despite ongoing declines in consumer confidence as households grapple with falling real wages and higher interest rates.

Data from Mastercard, compiled for the Australian Retailers Association, showed retail sales were 7.8 per cent higher over the year to May.

Related Articles

Leave a Reply

Your email address will not be published.

Back to top button