Key takeaways:
- Labour market remains strong: The unemployment rate held steady at a very low 4.1% in May, and underemployment dropped to 5.9% – 0.8 percentage points lower than a year ago – indicating continued labour market strength despite a small fall in employment (-2,000) after a large April gain (+87,000).
- Hours worked suggest economic resilience: Total hours worked rose 3.1% year-on-year, which typically aligns with 2–2.5% real GDP growth, suggesting the broader economy is not as weak as some indicators imply.
- Forward-looking risks emerging: Survey data – such as higher unemployment expectations in the Consumer Confidence survey and weaker employment intentions in the NAB Business Survey – suggest possible softening ahead, although job ad volumes have not dropped significantly yet.
- RBA likely to cut rates further: The Reserve Bank is expected to reduce interest rates in July and August to support growth and avoid an unnecessary rise in unemployment, which has been crucial in maintaining credit quality despite cost-of-living pressures.
Bottom line:
The good news again is the unemployment rate remained very low at 4.1% in May. While employment fell 2,000, this followed an outsized gain of 87,000 in April, so should be assessed in that context. Other indicators remained favourable with the underemployment rate remaining a very low 5.9% (0.8% lower than a year earlier) and hours worked some 3.1% higher y/y (not something that is consistent with a weak economy).
Of course these figures are backward looking, reflecting economic conditions of a few months ago. The rise in unemployment expectations in the Consumer Confidence survey and weaker employment intentions in the NAB Business Survey bear watching though have yet to manifest themselves in any sharp drop in job advertising.
The RBA became more concerned about the growth outlook and revised up its unemployment forecasts a little in mid-May reflecting concerns about negative impacts from tariffs. The forecasts assume two further interest rate cuts, without which even weaker growth and unemployment outcomes would result.
I’m still expecting the Board to reduce interest rates further in July and August to ensure it does not get behind the economy, which would result in an unnecessary rise in unemployment given inflation is forecast to be close to target. Low unemployment has been an important positive supporting credit quality in this cycle in the face of significant cost pressures on consumers and businesses.
Detail:
- The unemployment rate was unchanged at a still very low 4.1% in May. As in the US – but different to other countries – the unemployment rate has been remarkably stable near what’s likely to be an at or slightly below full employment level.
- Employment was estimated to have fallen 2,000 in May, weaker than economists’ forecasts. However, as this followed an unusually large rise in employment of 87,000 reported for April, the May result is not something to be worried about. The trend rate of employment growth remains a healthy 28,000 per month.
- Within the total, full-time employment rose 38,700, while part-time employment fell 41,100. I don’t find these month-by-month changes in full and part time employment reliable. I was more interested in the 1.3% m/m and the 3.1% y/y rises in hours worked. Some of the rise reflected a bounce back from cyclone effects at the end of March and early April and some the impact of the Easter, ANZAC Day and school holidays in April. While the seasonal factors likely overstate the gains somewhat, a 2.5-3% y/y gain in hours worked would normally be consistent with 2-2.5% real growth and suggests the economy is not especially weak.
- Underemployment dropped slightly in the month (-0.1ppts to 5.9%) leaving the underemployment rate 0.8 percentage points lower than a year ago. Underemployment always rises in a weak labour market, so the fall in the last year suggests labour market conditions overall remain relatively healthy.
- There have been a number of weak employment indicators in survey results this month that are worth monitoring closely – the rise in unemployment expectations in the Consumer Confidence survey and the drop in Employment Expectations in the NAB Business Survey. These have not as yet been confirmed by a significant drop in job advertisements (SEEK -0.3% m/m in May and ANZ Indeed -1.2%).
- State unemployment rate trends have not altered much in recent times. Most states’ unemployment rates are closely clustered around 4%. The moves of note are the slight rise in the WA unemployment rate in recent times, from a below average rate, and the continuation of the Victorian unemployment rate above the national average, though this seems to have improved marginally in recent times. Tasmania’s low unemployment rate reflects outward interstate migration as employment growth has been weak.
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Ivan joined CreditorWatch as Chief Economist in October 2024. He is a highly experienced chief economist and keynote speaker on the economy and financial markets.
Most recently, Ivan was Chief Economist, Corporate & Institutional Banking for National Australia Bank, but has also been Chief Economist for Qantas and Chief Economist (Australia) for ANZ and Deutsche Bank. Ivan has also consulted to SEEK, IATA and Virgin Australia.
Ivan holds a Bachelor of Economics with Honours from the University of Tasmania and commenced his career at the Reserve Bank of Australia.
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