Jobs growth boomed in June, unemployment at 48-year low, RBA to hike by 0.5% in Aug, possibly 0.75%

Key points:

• Employment rose yet again by a stronger than expected 88,400 in June, with full time employment up by 52,900 and part-time employment up by 35,500
• Hours worked were flat, likely reflecting more workers on sick leave due to flu or covid, but are up by 3.8% over the last year
• Reflecting the strong jobs growth unemployment fell to 3.5%, which is its lowest since August 1974 when it was 2.8%
• This came despite a new record high for the participation rate of 66.8%
• Underemployment rose to 6.1%, but underutilisation was unchanged at 9.6%

Employment in June rose by much more than expected (up 88,400 versus market expectations for a 30,000 rise), participation rose to a new record high and the quality of jobs growth remains very strong with another surge in full time jobs.

Source: ABS, AMP

Despite the rise in participation unemployment plunged to 3.5%, which is a new 48 year low. This has fallen faster than the RBA anticipated which didn’t see unemployment falling to around 3.5% until June next year.

Source: ABS, AMP

While underemployment rose to 6.1%, the fall in unemployment left the labour underutilisation rate unchanged at 9.6% which is its lowest since 1982, and well below the levels that prevailed over the low wage growth 2014-2021 period.

Source: ABS, AMP

Looking forward our Jobs Leading Indicator which is based on job openings points to continued strong employment growth for the next few months. As a result, the unemployment rate is now likely to fall further to around 3.2% in the next 3-6 months. Thereafter, its likely to start rising again reflecting the lagged impact of rising interest rates and falling real incomes on economic growth and hence labour demand. Note that the labour market is usually a lagging economic indicator so its continuing strength now despite falling consumer confidence is not surprising.

Source: ABS, NAB, ANZ. AMP

The tight labour market evident in the fall in both unemployment at its lowest since 1974 and labour underutilisation at its lowest since 1982 point to an acceleration in wages growth ahead.

Source: ABS, AMP

Implications for the RBA

The strong June jobs report leaves the RBA on track for raising rates again at its August meeting. Given the ongoing concern about high and still rising inflation and the need to prevent inflation expectations moving higher we expect another 0.5% rate hike in August. The move by the Bank of Canada to hike by 1% and the possibility of the same by the Fed later this month suggest that the RBA may hike by 0.75%, particularly if the June quarter CPI is another shocker (ie well beyond our expectation for a rise to 6.2%yoy). However, we lean to the view that 0.75% plus hikes will be avoided in Australia given that the RBA meets monthly whereas the Fed and BoC only meet 6 weekly and so the RBA does not need to hike as much as they do at each meeting to achieve the same over a 3-month period and inflation and wages pressures are a bit less in Australia than they are in the US and Canada.

We continue to see the peak in the cash rate being around 2.5% in the first half of next year, but the risks are on the upside and it could come earlier given the extent of inflation pressures.

Having a new 48 year low in the unemployment rate is good news – but the comparison to 1974 is not necessarily a good omen as after that we slid into a bad bout of stagflation. Of course, many of the circumstances are different today, but the 1970s experience highlights the need for the RBA to act quickly to make sure inflation expectations do not rise significantly because if they do it will be much harder to get inflation back down. The good news is that they and other central banks are showing that they are well aware of the lessons of the 1970s.

Ends

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