Jobs data points to rate cuts; analysts not so sure

Weaker-than-expected employment data backs expectations the Reserve Bank will be able to start cutting interest rates in the second half of the year.

Weaker-than-expected employment data backs expectations the Reserve Bank will be able to start cutting interest rates in the second half of the year after the jobless rate hit a two-year high.

However, economists say the weakness implied by the labour force survey may have been overstated by seasonal factors and isn’t bad enough to justify immediate rate cuts.

Market pricing for the first cut in the cash rate target shifted forward two months to September after the unemployment rate for January hit a two-year high of 4.1 per cent, versus 4 per cent expected by economists. A total of 41 basis points of rate cuts was expected by year end.

Employment growth was lower than expected for a second month running.

Seasonally adjusted employment rose by 500 compared to Bloomberg’s consensus estimate that it would rise by 25,000 in the wake of a surprisingly sharp fall of 62,700 recorded for December.

The statistician noted that, compared to pre-Covid levels, there were an extra 23,400 people waiting to start work that were categorised as being unemployed, and there were an extra 86,800 who were also waiting to start work but were not categorised as being in the labour force.

If the extra 23,400 “attached but unemployed” workers were counted as employed, the unemployment rate could have been as low as 3.9 per cent and employment growth higher.

“This was the first time in two years, since January 2022, that the unemployment rate had been above 4 per cent,” ABS head of ­labour statistics Bjorn Jarvis said.

“However, similar to January 2022 and 2023, the increase in the unemployment rate in January 2024 coincided with a higher-than-usual number of people who were not employed but who said they will be starting or returning to work in the future.

“While there were more unemployed people in January, there were also more unemployed people who were expecting to start a job in the next four weeks.

“This may be an indication of a changing seasonal dynamic within the labour market, around when people start working after the summer holiday period.”

In January 2022, 2023 and 2024, about 5 per cent of people who were not employed were ­attached to a job, compared with about 4 per cent in the January surveys prior to the pandemic.

AMP deputy chief economist Diana Mousina.

NAB head of market economics Tapas Strickland said: “They are only simple assumptions, but they do suggest we should be cautious in overinterpreting the degree of softness in the jobs data given shifting seasonality.”

Also illustrative of that shifting seasonality was a 2.5 per cent month-on-month drop in hours worked. A similar 2.1 per cent fall in January 2023 was followed by a 4 per cent rise in February. A 7.8 per cent fall in hours worked in January 2022 was followed by an 8.3 per cent rise in February.

Mr Strickland said the labour market had been gradually becoming “less tight” over the past year with the unemployment rate having lifted from a 50-year low of 3.4 per cent in October 2022.

However, shifting seasonal patterns may have affected the ­recent data.

“Given shifting seasonality we think the RBA will wait until next month’s data before drawing any firm conclusions,” he said.

The RBA’s latest Statement on Monetary Policy forecast the unemployment rate to rise to 4.2 per cent by mid-2024 and 4.3 per cent by the end of the year, nudging above the RBA’s estimate of the non-accelerating inflation rate of unemployment, or NAIRU, currently pegged at about 4.25 per cent.

“In other words, some softening in the labour market was expected,” Mr Strickland said.

“However, if the lift in the unemployment rate is sustained next month, that would suggest a softening in the labour market is occurring faster than the RBA’s forecast track, which could give the RBA greater confidence in their forecasts of inflation heading back to the midpoint of the band.”

That makes the February labour force data even more important than usual.

But despite the potential for some seasonal issues in the data, it is clear that the labour market has weakened since last year and a further slowing in jobs growth is expected, based on leading indicators, according to AMP.

“Applications per advertised jobs on Seek has risen substantially since 2022, which usually leads the unemployment rate,” AMP deputy chief economist Diana Mousina said.

The Seek data showed about 150 applicants per jobs advertised in November. The number has soared from what was at the time an 11-year low of about 60 people in May 2022, five months before the unemployment rate troughed at 3.4 per cent.

Similarly, the number of job vacancies per unemployed person had dropped from a high of 0.94 in 2022 to 0.65 by November 2023, indicating lessening demand for employees.

Ms Mousina said job vacancies still looked high relative to pre-Covid levels, but may not fall back to historical norms if businesses hoard workers – as has been reported in Australia and overseas – in fear of having to rehire once growth started to rise. Instead, they could reduce hours worked.

However, AMP’s Jobs Leading Indicator – which includes job vacancies, job advertisements and hiring plans – continues to suggest lower employment growth ahead. AMP expects the unemployment rate to hit 4.5 per cent by the middle of this year.

Ms Mousina said the slowing jobs market was “currently not bad enough to justify a near-term RBA rate cut”.