• Employment rose by 26,100 in March after rising by 700 in February (previously reported as a rise in jobs of 300). Full-time jobs fell by 8,800 while part-time jobs rose by 34,900. Economists had tipped a 17,000 increase in jobs.
• Hours worked fell by 1.1 per cent in March. Hours worked are up by 0.7 per cent over the year.
• Jobless rate: The unemployment rate fell from 5.8 per cent to a 2½-year low of 5.7 per cent in March (lowest since September 2013). The trend unemployment rate held steady at 5.8 per cent – a 27-month low. The participation rate was steady at 64.9 per cent.
• Unemployment across states in March: NSW 5.3 per cent (February 5.3 per cent); Victoria 5.7 per cent (6.0 per cent); Queensland 6.1 per cent (5.6 per cent); South Australia 7.2 per cent (7.7 per cent); Western Australia 5.5 per cent (6.0 per cent); Tasmania 6.8 per cent (6.9 per cent). In trend terms unemployment in the Northern Territory rose from 4.4 per cent to 4.5 per cent; ACT unemployment fell from 4.5 per cent to 4.3 per cent.
  ¾ In smoothed terms, discount fares fell by 3.6 per cent over the year to April. But business class airfares rose at a smoothed 7.4 per cent annual rate with “restricted economy” fares up by 3.6 per cent

What does it all mean?

• The latest employment result was just what households and businesses ordered. After a couple of months of consolidation, employment has recorded a sizeable rebound. And while the pessimists may focus on the fact that hours worked fell in the March, the slide in the unemployment rate to 5.7 per cent – the lowest levels in 2½ years – will provide a big boost to confidence amongst Aussie consumers. And as we saw over the latter part of 2015, job security plays a big part in household consumption.
• Labour market conditions have certainly improved over the past year; business conditions are healthier; profitability has improved; and more importantly the housing sector is providing significant support to an array of industries.
• After racking up almost 300,000 new jobs in 2015, there was likely to be inevitable period of consolidation. And the volatility in financial markets in the early part of 2016 was unlikely to see businesses commit to significant hiring. The employment growth in March is a positive shift in momentum, however while we expect employment to strengthen over 2016, it is likely that employers will be more circumspect in hiring given the uncertainty around the timing of the Federal Election.
• The Reserve Bank will be comforted by the latest job market figures. No doubt it would like to see a lift in productivity but that will take time as the significant new job hires over 2015 get settled into their new working environments. In addition policymakers will take the latest figures with a degree of caution given the seasonality issues with the early timing of Easter and even the extra day in February (leap year). The key will be the inflation data, due on April 27. A super low inflation result would allow the Reserve Bank to contemplate another rate cut – in effect asking the question whether the economy could run at a faster pace without creating asset bubbles. We expect rates to remain on hold over the next couple of months.
• The Reserve Bank will also be heartened that the youth jobless rate (15-24 year olds) fell from 12.2 per cent to a near 3-year low of 12 per cent.
• It pays to shop around. That is common advice but it certainly is the case with airfares. In smoothed terms, discount airfares are almost 4 per cent lower than a year ago but business and full fare economy fares are up on a year ago – over 7 per cent higher in the case of business fares. With plenty of people travelling – especially businesspeople – airlines aren’t keen to trim fares.

What do the figures show?

Labour force:

• Employment rose by 26,100 in March after rising by 700 in February (previously reported as a rise in jobs of 300). Full-time jobs fell by 8,800 while part-time jobs rose by 34,900. Economists had tipped a 17,000 increase in jobs.
• Hours worked fell by 1.1 per cent in March. Hours worked are up by 0.7 per cent over the year.
• The unemployment rate fell from 5.8 per cent to a 2½-year low of 5.7 per cent in March (lowest since September 2013). The trend unemployment rate held steady at 5.8 per cent – a 27-month low.
• The participation rate was steady at 64.9 per cent.
• A total of 235,300 jobs were added over the year to March. The annual growth rate eased from 2.1 per cent to 2 per cent. In trend terms, employment has risen for 28 consecutive months.
• The working age population rose by 30,900 in March. The working age population rose by 285,600 over the past year. The working age population is up 1.49 per cent over the past year.
• Unemployment across states in March: NSW 5.3 per cent (February 5.3 per cent); Victoria 5.7 per cent (6.0 per cent); Queensland 6.1 per cent (5.6 per cent); South Australia 7.2 per cent (7.7 per cent); Western Australia 5.5 per cent (6.0 per cent); Tasmania 6.8 per cent (6.9 per cent). In trend terms unemployment in the Northern Territory rose from 4.4 per cent to 4.5 per cent; ACT unemployment fell from 4.5 per cent to 4.3 per cent.
• Jobs across states and territories in March: NSW +4,800; Victoria +10,600; Queensland -15,400; South Australia +4,600; Western Australia +16,600; Tasmania +800. Trend terms: Northern Territory -600; ACT unchanged.

Airfares

• The Bureau of Infrastructure, Transport and Regional Economics (BITRE) reports that business class airfares fell by 0.2 per cent in April to stand 6.2 per cent higher than a year ago. Earlier in February airfares were up 8.2 per cent on a year ago – the strongest growth in 10 months. In smoothed terms, business class airfares are up 7.4 per cent on the year, the fastest growth pace in 13 months.
• “Restricted economy” airfares also fell by 0.2 per cent in April after rising by 0.1 per cent in March. Restricted economy airfares are up 3.6 per cent on a year ago. In smoothed terms restricted economy fares were also up 3.6 per cent over the year. Airfares have been rising at a 6.5 per cent average annual pace for the past three years.
• Discount airfares remain volatile. Discount fares rose by 6.4 per cent in April after falling by 6.6 per cent in March and rising by 7.5 per cent in February. Discount fares are 9.9 per cent higher than a year ago after being down 13 per cent on a year ago in March. In smoothed terms, discount airfares are down 3.6 per cent on a year ago.
• In real terms however, discount airfares are only 6.0 per cent above the lowest levels recorded (March 2011).

Why is the data important?

• The Labour Force estimates are derived from a monthly survey conducted by the Bureau of Statistics. The population survey is based on a multi-stage area sample of private dwellings (currently about 22,800 houses, flats, etc.) and a sample of non-private dwellings (hotels, motels, etc.). The survey covers about 0.24 per cent of the population of Australia and includes all people over 15 years of age, except defence personnel.
• If more people are employed, then there is greater spending power in the economy. But at the same time companies may adjust the work hours of employees. If employees work less hours, and therefore get paid less, then spending power in the economy is reduced.
• The Bureau of Infrastructure, Transport and Regional Economics (BITRE) releases regular aviation data. The BITRE releases Airport Traffic data and the Australian Domestic Airline Activity publication each month as well as the Domestic Air Fares publication. The data provides insights on airline activity as well as trends in the broader Australian economy. If more people are flying, then it suggests businesses are more active and/or consumers are more confident.

What are the implications?

• Interest rates remain on hold. The Reserve Bank will want to assess a lot more data before deciding the next move on rates.
• The Bureau of Statistics has estimated that the number of people in the working age population. Rather than rising by 22,300 a month, the increase in the past three months averaged almost 31,000 – the biggest increase in almost two years. If this assumption is correct and retained, it may make it more difficult for the jobless rate to ease further in the next few months.

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What do the figures show? 

• The Producer Price Index (PPI), or final stage prices, rose by 0.3 per cent in the March quarter to stand 1.6 per cent higher than a year ago. Previously, in the December quarter, the PPI rose by 0.2 per cent to stand 1.0 per cent higher than a year ago.
• Of final stage prices, domestic good prices rose by 0.4 per cent while import good prices fell by 0.4 per cent.
• The Bureau of Statistics notes that the 0.3 per cent lift in final stage prices was mainly due to rise in the prices received for “mainly due to rises in the prices received for building construction (+0.8%), other agriculture (+6.1%) and petroleum refining and petroleum fuel manufacturing (+4.2%). Partly offsetting these rises were falls in prices received for pharmaceutical and medicinal product manufacturing (–4.8%).
• Consumer good prices rose by 0.3 per cent in the quarter while capital good prices rose by 0.4 per cent. Over the year, prices of consumer goods rose by 1.8 per cent, while capital goods rose 1.1 per cent.
• Prices of intermediate goods were unchanged in the quarter to stand 1.5 per cent higher over the year. Preliminary stage materials rose by 0.2 per cent in the quarter to be 1.5 per cent higher than a year ago.

What is the importance of the economic data?

• The producer price figures are important in flagging price pressures at an early stage. If business costs are rising, the risk is that these will be passed on in terms of higher prices of final consumer goods. The Consumer Price Index is regarded as the key gauge of economy-wide inflation.

What are the implications for interest rates and investors?

• The producer price index doesn’t track the consumer price index very closely, as it tends to be influenced by volatile factors such as the global oil price and the Australian dollar. And given the timing of the produce price data until after the Consumer Price Index it will most probably becomes less relevant for forecasters. Still, it’s worth keeping an eye on in order to track the cost pressures facing business and the implications for profitability.
• It is clear that the relatively subdued business inflation reading was largely driven by the appreciation in the Australian dollar. In fact prices of domestic goods rose by just 0.4 per cent, while imported goods slumped by almost 0.4 per cent in the March quarter. As we discussed in our report on consumer prices last week, the substantial slide in imported prices will ensure that the Reserve Bank remains comfortable that inflation remains well contained – especially given that the Aussie dollar is likely to hold around current levels over the coming year.
• The data also confirms that the tough trading conditions that have been faced by businesses over the past year is moderating. The difference between final stage and preliminary producer inflation was 0.1 percentage points in annual terms – highlighting that margin expansion occured in the March quarter albeit at a rather moderate pace. Interestingly the expansion in margins was the first positive result we have seen in three years.
• Overall there is nothing in the latest PPI data to worry the Reserve Bank – it is clear that inflation remains relatively mild. The risks certainly lie with a further rate cut over the near term. However CommSec does not expect rates to be cut next week. Rather polickymakers are likely to await on the Federal Budget before deciding if a further rate cut is necessary.

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• In November, full-time jobs fell by 4,200 after rising by 17,600 in October. Part-time jobs rose by 18,100 after falling by 7,400 in October. Full-time jobs have only fallen once in the past five months.
• The unemployment rate decreased from 5.4 per cent to 5.2 per cent in November. The participation rate fell from 65.2 per cent to 65.1 per cent – near six year lows.
• The number of hours worked rose by 0.1 per cent in November after falling by 0.3 per cent in October and now stands 0.3 per cent higher than a year ago.
• Unemployment across states and territories: NSW 5.1 per cent (5.2 per cent in October); Victoria 5.5 per cent (5.4 per cent); Queensland 6.0 per cent (6.1 per cent); South Australia 5.3 per cent (5.6 per cent); Western Australia 4.1 per cent (4.6 per cent); Tasmania 6.7 per cent (6.7 per cent); Northern Territory 3.8 per cent (3.9 per cent); ACT 4.1 per cent (4.0 per cent).

What does it all mean?

• The doomsters have got it wrong – again. More jobs created, more hours worked and fewer people unemployed. Overall the Australian economy is holding up well despite a very uncertain global environment. While there are a number of high profile company failures and job losses, beneath the surface small and medium-sized business are still keen to put on more staff. The anecdotal evidence is that it is hard to attract and retain staff and today’s jobs figures back up these observations.
• It was certainly encouraging to see the lift in overall employment. In fact total employment has increased for three consecutive months, hours worked is on the rise and the slide in the unemployment rate is certainly a confidence booster for the economy. However it is not all smooth sailing. The cynics would look at the fall in full-time jobs coupled with the participation rate – which is holding at near six-year lows – and conclude something more concerning.
• The truth is somewhere in the middle. The labour market is healthy without shooting the lights out. And while it is encouraging that employment grew, more forward looking indicators like job advertisements have suggested that further labour market gains may be more circumspect. In fact internet and newspaper job advertisements have fallen for eight consecutive months, suggesting job growth is likely to flat-line in coming months.
  It is clear that while employers aren’t keen to hire unless they have to, however they aren’t firing existing staff either. While jobs are being lost in some industries, clearly they are being created in other industries. Overall it does seem like a fair proportion of Aussie businesses are holding onto existing staff and waiting for an improvement in economic conditions.
• Over the past year the missing ingredient in the domestic economy has been confidence, however there are anecdotal signs that there is an improvement in confidence. Rate cuts, a pickup in housing activity, rising share markets should provide some level of encouragement to policymakers, households and businesses.
  In a perverse way the unemployment rate fell because more people have given up the search for work. Over the past couple of months a smaller proportion of people are in the workforce – people in jobs or are looking for work – with the participation rate holding just shy of the 6-year lows.
• The Reserve Bank won’t look too deeply into today’s data as figures in coming months will be more telling. But the data is consistent with the Reserve Bank retiring to the sidelines and assess more information. Chances of further rate cuts have receded modestly.

What do the figures show?

• Employment rose by 13,900 in November after a revised gain of 10,100 jobs in October (previously +10,700). Economists had expected a flat result. In November, full-time jobs fell by 4,200 after rising by 17,600 in October. Part-time jobs rose by 18,100 after falling by 7,400 in October. Full-time jobs have only fallen once in the past five months.
• The annual employment growth rate rose from 0.9 per cent to 1.1 per cent in November. The working age population rose by 24,500 in November after lifting by 24,400 in October. The working age population grew by 1.69 per cent over the past year.
• The unemployment rate decreased from 5.4 per cent to 5.2 per cent in November. The participation rate fell from 65.2 per cent to 65.1 per cent – near six year lows. The number of hours worked rose by 0.1 per cent in November after falling by 0.3 per cent in October and now stands 0.3 per cent higher than a year ago.
• Unemployment across states and territories: NSW 5.1 per cent (5.2 per cent in October); Victoria 5.5 per cent (5.4 per cent); Queensland 6.0 per cent (6.1 per cent); South Australia 5.3 per cent (5.6 per cent); Western Australia 4.1 per cent (4.6 per cent); Tasmania 6.7 per cent (6.7 per cent); Northern Territory 3.8 per cent (3.9 per cent); ACT 4.1 per cent (4.0 per cent).
• Queensland recorded the biggest job gains in November (+27,700), followed by Western Australia (+5,400), Northern Territory (+300 in trend terms). Jobs fell most in NSW (-18,000), followed by Victoria (-13,800), Tasmania (-3,200), and South Australia (-1,300). Employment was flat in the ACT in trend terms.

What is the importance of the economic data?

• The Labour Force estimates are derived from a monthly survey conducted by the Bureau of Statistics. The population survey is based on a multi-stage area sample of private dwellings (currently about 22,800 houses, flats, etc.) and a sample of non-private dwellings (hotels, motels, etc.). The survey covers about 0.24 per cent of the population of Australia and includes all people over 15 years of age, except defence personnel.
• If more people are employed, then there is greater spending power in the economy. But at the same time companies may adjust the work hours of employees. If employees work less hours, and therefore get paid less, then spending power in the economy is reduced.

What are the implications for interest rates and investors?
The jobs data will be closely watched by the Reserve Bank in coming months. An array of indicators has suggested that activity levels have bottomed out and showing modest signs of improving. And while policymakers will want to get a better gauge of the impact from the recent stimulatory efforts further rate cuts still remain on the cards.

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• In June part-time jobs rose by 6,600 after falling by 8,600 in May.
• Full-time jobs fell by 33,500 after rising by 36,400 in May.
• The unemployment rate rose from 5.1 per cent to 5.2 per cent in June.
• The participation rate eased from 65.4 per cent to 65.2 per cent.
• The number of hours worked fell by 1.2 per cent in June to be 1 per cent lower in annual terms.
• Unemployment across states and territories: NSW 5.1 per cent (5.0 per cent in May); Victoria 5.5 per cent (5.4 per cent); Queensland 5.3 per cent (5.7 per cent); South Australia 6.4 per cent (5.2 per cent); Western Australia 3.5 per cent (3.8 per cent); Tasmania 7.4 per cent (6.5 per cent); Northern Territory 4.2 per cent (4.1 per cent); ACT 3.6 per cent (3.6 per cent).

What does it all mean?

After singing out of tune for the past few months the job market is certainly back in line with the consistent sluggish performance of the broader economy. Western Australia is still shooting the lights out with a jobless rate of 3.5 per cent, but other states are struggling for momentum.

• In recent times an array of well publicised companies have gone into administration, yet the labour market data suggests that about 86,000 jobs have been created since the start of the year. The job market is very much a mixed picture – high profile job losses mixed in with job gains in key industries like mining and mining related services.
• The latest result confirms a similar view portrayed by the job advertisements series. Job ads have fallen for three consecutive months and are down almost 9 per cent on a year ago. And given that job ads are a leading indicator, it is likely that jobs growth will be much more subdued in coming months.
• Overall it is clear that employers aren’t keen to significantly add to their workforce and at the same time there isn’t enough demand for existing employees to work longer hours. Hours worked fell by 1.2 per cent in June – marking the biggest monthly fall in five months.
• Businesses have highlighted that confidence levels are poor and trading conditions are particularly tough. However the improvement in household budgets – due to the rate cuts and Federal government handouts – may just provide a lifeline for businesses over the next few months, particularly in the retail and service related sectors. If retail activity picks up, businesses will be more hesitant to lay off existing staff.
• The weak jobs result will be looked at closely by the Reserve Bank. However the central bank will be more focused on the current situation in the Euro Zone and even the slowdown in China. Any escalation of the Euro Zone debt crisis is likely to prompt the Reserve Bank to move sooner rather than later when it comes to rates. In our judgement – and even assuming Europe still muddles through in the next few weeks – the next interest rate cut is likely to occur in August. Policymakers should feel more comfortable about inflation after the release of the June quarter inflation figures on July 25, and the focus will then turn to further insulating Australia from the negative global news flow.

What do the figures show?

• Employment fell by 27,000 in June after rising by a revised 27,900 (previously 38,900) in May. Economists had expected a flat result. In June part-time jobs rose by 6,600 after falling by 8,600 in May. Full-time jobs fell by 33,500 after rising by 36,400 in May.
• The annual employment growth rate rose eased from 1 per cent to 0.4 per cent in June. The working age population rose by 19,500 in June after lifting by 19,700 in May. The working age population grew by 1.22 per cent over the past year – equal to the smallest gain in almost 12 years.
• The unemployment rate rose from 5.1 per cent to 5.2 per cent in June. The participation rate fell from 65.4 per cent to 65.2 per cent.
• The number of hours worked fell by 1.2 per cent in June to be down 1.0 per cent in annual terms.
• Unemployment across states and territories: NSW 5.1 per cent (5.0 per cent in May); Victoria 5.5 per cent (5.4 per cent); Queensland 5.3 per cent (5.7 per cent); South Australia 6.4 per cent (5.2 per cent); Western Australia 3.5 per cent (3.8 per cent); Tasmania 7.4 per cent (6.5 per cent); Northern Territory 4.2 per cent (4.1 per cent); ACT 3.6 per cent (3.6 per cent).Western Australia was the only state to record job gains in June (+1,000). Jobs fell the most in NSW (-14,600) followed by Queensland (-10,400), South Australia (-4,800), Victoria (-3,200), and Tasmania (-3,100). In trend terms employment fell in Northern Territory (-800) and rose in the ACT (+300).

What is the importance of the economic data?

• The Labour Force estimates are derived from a monthly survey conducted by the Bureau of Statistics. The population survey is based on a multi-stage area sample of private dwellings (currently about 22,800 houses, flats, etc.) and a sample of non-private dwellings (hotels, motels, etc.).
• The survey covers about 0.24 per cent of the population of Australia and includes all people over 15 years of age, except defence personnel.If more people are employed, then there is greater spending power in the economy. But at the same time companies may adjust the work hours of employees. If employees work less hours, and therefore get paid less, then spending power in the economy is reduced.

What are the implications for interest rates and investors?

• The rate cuts over the last couple of months will help to support activity in coming months and provide businesses with a bit more breathing space – especially given that trading conditions are difficult. However the downside risks to global growth – particularly the slowdown in China and ongoing Euro zone debt concerns – will ensure businesses still show a level of cautiousness.
• CommSec is pencilling in a quarter per cent rate cut in August, given the ongoing European debt concerns and the overall low inflation environment.
• As activity levels pick up over the coming year the Reserve Bank will focus more predominantly on wage costs and labour productivity.

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• Just under half of financial assets at private sector companies are held in cash or deposits, while households are holding just over a quarter of their assets in cash and deposits.
• The high level of liquid assets is both positive and negative. Companies are well able to deal with the challenges posed by the volatile global financial conditions. But at what point does the level of cash become too much? It is easy to hold funds in liquid form of cash and deposits, but shareholders also want companies to be exploring opportunities to increase efficiency, productivity or growing organically or by acquisition.
• Australian consumers and superannuation funds are also maintaining extraordinarily high holdings of cash and deposits. In fact super funds are holding almost double the “normal” cash holdings with the proportion of assets sitting just over 14 per cent.

To read the full report from CommSec, click here.

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The latest Reserve Bank Board minutes highlights that while the case for a rate cut was compelling, it was a “finely balanced” decision that was swayed by the ongoing European debt crisis.

Interestingly the minutes make mention of the general health of the domestic economy, with the recent round of domestic data “generally had not suggested a significant weakening in conditions”. The Reserve Bank is well aware of the multi-speed nature of the economy however recent data on retail sales, labour market, mining investment and even business credit implied a “degree of resilience” in domestic activity. In fact in recent times policy officials have been at pains to highlight that any inherent weakness is more a confidence issue than as a result of significant structural weakness.

To read the full report, click here.

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In seasonally adjusted terms the CPI fell by 0.2 per cent. The CPI stands just 1.6 per cent higher than a year ago – the lowest rate in 2½ years. To read CommSec’s report, click here.

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While the European debt crisis is dominating attention the risks to the global economy have not materialised to the same extent as in 2008.

“the worst has not happened. Financial markets, while hardly brimming with confidence, have recovered somewhat over the past couple of months… High-frequency gauges of business conditions and confidence have stabilised over the past couple of months in Asia and North America, and even in Europe. We have not seen the very steep fall that we saw in all these indicators in late 2008.”

Interestingly the higher cost of wholesale funding and resulting out of cycle rate hikes by the domestic banks was anticipated by the Reserve Bank and was a key reason why interest rates were not cut in February.

“..the Board lower the cash rate by 50 basis points in the closing months of 2011. Perhaps surprisingly in the face of developments in wholesale funding costs, this was initially fully reflected in a reduction in most lending rates, though there has been a partial reversal of that recently.”

The Governor weighed in on the debate regarding the lack of consumer spending.

“Spending is growing in line with income, but people are spending their money differently. The retail sector is finding it has to adapt to this changed environment. Some other industries are struggling with the high exchange rate. Meanwhile certain service sectors are growing quite smartly.”

The key focus for the Reserve Bank is massaging the domestic economy through the resource investment boom – “which is still building and which will take the share of business investment in GDP to its highest level for 50 years” – while ensuring overall growth remains healthy and capacity constraints don’t add to inflationary pressures. 

What does it all mean?
The Reserve Bank Governor has delivered his clearest statement yet that the domestic economy is holding up well despite an array of headwinds. The clear sense from today’s testimony to the Parliamentary Economics Committee is that Reserve Bank officials are extremely comfortable with current settings. Interest rate settings are around “normal” levels, and while the tame inflation outlook allows scope to cut interest rates the need to cut further has yet to materialise. 

In addition the global economy has not fallen of a cliff and the “worst case scenario” has been avoided. The Governor made mention on numerous occasions that despite the ongoing European debt crisis indicators across the globe on business confidence and confidence have not recorded the steep fall that took place in 2008. The Governor took time to highlight the strengths of economies across the globe with particular focus on the cashed up balance sheets of US corporates and the likelihood that the sector “will at some point be able to start moving ahead more quickly”.

The pickup in the pace of hiring in the US and the more sustainable pace of Chinese growth were also discussed. Clearly the slowdown in China will be closely assessed given its importance to the Australian growth story. But the Governor was more comfortable that the Chinese slowdown had achieved the desired results and left Chinese authorities with more scope to move when it came to stimulating their economy. 

The Reserve Bank remains quietly confident that the Australian economy is on a sustainable recovery path, but the key is ensuring that growth remains robust while inflation remains in-check. The focus for the central bank is clearly navigating the Australian economy through the resource investment boom which will “take the share of business investment in GDP to its highest level in 50 years.” The challenge for authorities is making sure that there is enough additional capacity in the economy to support the investment boom without significantly adding to inflationary pressures.

Interestingly the Governor made mention of the fact that the Reserve Bank was well aware of the rise in wholesale funding for the domestic banks, but to some degree he was surprised that the banks had passed on all of the rate cuts late last year. In effect the scenario was unsustainable and the resulting out of cycle rate hikes by banks was anticipated, and was a key strategic reason as to why the Reserve Bank did not cut interest rates in February. It is clear that the Central Bank is comfortable with current lending rates and at the same time conserving firepower to use in the future just in case downside risks gain traction.  

While acknowledging that there has been a big change in household behaviour toward greater conservatism, the Governor clarified that “spending is growing in line with incomes”. In recent times there has been by a shift in consumers preference to spend on service rather than goods. Household balance sheets remain robust, and with the household savings ratio holding near a 25-year high any sustained improvement in confidence will prompt a pickup in spending. And while this makes it harder for retailers, from a broader economy-wide perspective it is not a bad thing that consumers are more conservative on spending and borrowing given the rise in margin pressures.

At present there are clear structural shifts that are taking place across the economy – in part due to the demand for Australian resources and higher exchange rate – and as the Governor highlighted while some sectors may contract other sectors will expand at a rapid pace. It is imperative for businesses to be fluid and adjust to the seismic shifts that are taking place and will define the economic landscape in years to come.

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• The unemployment rate was unchanged at 4.9 per cent in June. The participation rate edged up from 65.5 per cent to 65.6 per cent. The working age population rose by 19,600.
• Employment rose by 23,400 people in June. Economists had tipped job gains of around 15,000. But the May result was sharply revised lower to show job losses of 500 (previously showed job gains of 7,800).
• Full-time employment rose by 59,000 in June (May jobs were down by 29,400) and part-time jobs fell by 35,600 (Mayjobs rose by 28,800).
• Average hours worked rose 0.5 per cent in June after rising by 0.5 per cent in May. The number of hours worked is up 1.7 per cent on a year ago.
• Across the states and territories unemployment rates in June were: NSW 5.2 per cent (4.9 per cent in May); Victoria4.6 per cent (5.1 per cent); Queensland 5.3 per cent (5.2 per cent); South Australia 5.1 per cent (5.4 per cent); Western Australia 4.2 per cent (4.3 per cent); Tasmania 5.5 per cent (5.8 per cent); Northern Territory 3.7 per cent (3.4 per cent); ACT 4.0 per cent (3.8 per cent).
• Victoria led the job gains in June (up 18,200) followed by South Australia (up 6,900) and Western Australia (up 2,600). NSW led the job losses (down by 17,000), followed by Northern Territory (down 1,000 in trend terms), Tasmania and Queensland (both down 700), and ACT (down 200 in trend terms).

What does it all mean?

• The latest employment data certainly looks robust – especially given the surge of 59,000 new full-time jobs. However it is just one month’s data and the monthly job figures tend to be volatile. Keep in mind that the prior two months saw full-time job losses of almost 80,000. In fact the previous month’s job gains of 7,800 has now been revised to show job losses of 500 people.
• A better indication of the labour market would be the unemployment rate which has effectively gone nowhere for seven months. It is clear that there is a better balance in terms of supply and demand in the labour market. Even annual employment growth rate has eased in recent months from a six-year high of 3.6 per cent to 2.0 per cent in June – the weakest growth rate in 16 months.
• Reading between the lines it is clear that the soft readings on economic activity are being reflected in the job market figures. Manufacturing, construction and the services sector all remain soft, while businesses are trimming new orders and profitability is being affected – given the lack of activity. No doubt the softer economy is ensuring that businesses remain cautious and more circumspect about future hiring.
• Overall the job market is in reasonable shape, but it is now going sideways. Certainly today’s result accords with the views of the Reserve Bank that the job market isn’t overly tight at present. Overall the Reserve Bank will remain hesitant about increasing interest rates anytime soon. CommSec is still pencilling in one rate hike over the next six months but the data flow would have to record a substantial improvement to justify the rate hike.
• Across the states the bulk of the job losses were recorded in NSW – consistent with the other key data releases this week showing weak retail spending and even weaker building approvals. It’s also worth noting that if you add up the employment results for the individual states the job gains total a much more sedate 8,100 instead of 23,400. It seems the seasonal adjustment process is playing a part in the overall result.

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• Australia’s trade surplus widened by $716 million to $2,333 million in May – a seven month high. Exports rose 3.2 per cent with imports up 0.4 per cent.
• The trade surplus with broader China (China and Hong Kong) has risen from $10.3 billion to $25 billion in the space of a year. The increased surplus is the equivalent of $650 for every man, woman and child in Australia.
• The Performance of Services index fell by 1.4 points to 48.5 in June. The sector has been contracting for 12 out of the last 14 months. Sales expanded at a slower pace while new orders recorded a modest improvement. Both input and selling prices fell in the month.

What does it all mean?

• The economy may be going through a soft patch but the dollars keep rolling in. The impact of the natural disasters on the trade balance is all but finished and Australia is again paying its way in the world. Australia has now notched up a total trade surplus in excess of $26 billion over the past 14 months. Despite the boost to Australian coffers the impact has yet to have a resounding effect on the economy. The weakness in business and consumer spending suggests the additional income is being saved rather than spent.
• However, as the Reserve Bank has highlighted, increased savings will eventually mean a pickup in spending down the track. It is the multiplier effect that essentially the Reserve Bank is banking on to spur domestic growth over the coming year. At present the additional income is not being spent, but as the recovery gains traction it is likely that Australian businesses and consumers will follow through on spending and investment plans.
• Higher commodity prices and increased demand for coal and iron ore has helped insulate the Australian economy in the near term and will be the catalyst for the robust 4½ per cent growth that the Reserve Bank is anticipating over the current financial year.
• Interestingly Australia is now as reliant on China as it was on Japan in the late 1980s. The trade surplus with broader China (China and Hong Kong) has risen from $10.3 billion to $25 billion in a space of a year- and it is still rising. The increase in the surplus is the equivalent of $650 for every man, woman and child in Australia. If the money was handed out to households chances are that it would be spent, but at present the dollars are heading back to mining companies and being paid out in wages, bonuses, tax, and dividends. For most Australians the effect will be felt in superannuation returns over the years to come.
• Australia is now as reliant on China as it was on Japan in the late 1980s. And it is still early days. While we will ride China’s successes in coming years we are also vulnerable to its stumbles.
• The data last Friday highlighted a surprising improvement in the manufacturing sector (from a level of substantial weakness) however there is no such turnaround taking place in the service sector. The services sector has contracted for 10 months out of the past year and there is no real catalyst to suggest a turnaround.
• There are a couple of factors driving the weakness in the services sector including higher interest rates, a stronger currency and the conservative buying behaviour of consumers and businesses.
• Businesses are under substantial pressure at present with costs edging higher and consumers driving hard bargains. Business margins are constrained, thus depressing profitability. On an encouraging note the forward looking index of new orders recorded is back in expansionary mode and holding at 8-month highs. However it is still early days and a period of interest rate stability would clearly help the situation. If the Reserve Bank stayed on the interest rate sidelines over the next couple of months, activity levels should improve.

What do the figures show?

• Australia’s trade surplus widened by $716 million to $2,333 million in May.
• Exports of goods and services rose by 3.2 per cent while imports of goods and services rose by 0.4 per cent. Exports are up 5.7 per cent on a year ago while imports are up 8.1 per cent.
• Rural exports rose by 6.4 per cent in May while non-rural exports rose by 0.6 per cent.
• Within imports, consumer imports rose by 4.0 per cent in May. Capital goods imports fell by 7.7 per cent while intermediate goods imports rose by 1.8 per cent.
• Consumer goods imports are down 5.1 per cent on a year ago but capital goods are down 3.6 per cent and intermediate goods are up by 18.6 per cent.
• The trade surplus with broader China (China and Hong Kong) has risen from $10.3 billion to $25 billion in the space of a year – a lift in the surplus that is the equivalent of $650 for every man women and child in Australia.

Performance of Services

• The Performance of Services index fell by 1.4 points in June to 48.5. The sector has been contracting for 12 out of the last 14 months. The key 50.0 level separates expansion from contraction.
• Four of the nine sub sectors expanded in the month – unchanged from the previous month. Sales expanded at a slower pace while new orders recorded a modest improvement. Both input and selling prices fell in the month.

What is the importance of the economic data?

• The monthly International Trade in Goods and Services release from the Bureau of Statistics provides estimates on exports and imports of physical goods (such as coal, beef and computers) and services (such as travel receipts). The balance of goods and services (BOGS) is a narrower description of Australia’s external position than the current account estimates. The import data is a useful gauge of consumer and business spending while exports reflect global demand as well as domestic influences such as drought.
• The Performance of Services index is released by Australian Industry Group and the Commonwealth Bank each month. The PSI is designed to provide a guide to conditions in retail, financial and other service sectors.

What are the implications for interest rates and investors?

• Not surprisingly the strength of the Australian dollar continues to have a detrimental impact on the services sector. Australia’s notched up a record $973 million services deficit in May. It was the 16^th consecutive services deficit and clearly highlights why the services sector has been contracting in recent times.

• No doubt the strength of the currency is making Australia a less attractive destination for overseas tourists and potential international students. Interestingly when the Aussie fell below US70c in 2009 the services sector notched up a series of surpluses.

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