NZ September quarter paints a stronger picture of employment than expected - Westpac

Analysts at Westpac noted that the September quarter labour market report painted a stronger picture of employment than expected. 

Key Quotes:

"However, labour cost inflation is showing no signs of a pickup.

Today’s labour market report for the September quarter painted a stronger picture of employment than expected, even after allowing for some unusual quarterly moves in the details. However, labour cost inflation is showing no signs of a pickup, even with consumer price inflation no longer at rock-bottom levels.

The unemployment rate fell from 4.8% to 4.6% in the September, outperforming market forecasts of a fall to 4.7%. This is the lowest unemployment rate since December 2008, when the Global Financial Crisis was in full force.

Interestingly, there was a very large increase in both employment (up 2.2% for the quarter) and the labour force participation rate (from 70.1% to 71.1%, a new record high). These two measures often have unusual, but correlated, swings from quarter to quarter, and the big rise in September followed a drop in June that didn’t jibe with other indicators of the labour market. It may be that the changes to the survey in June 2016 have disrupted the seasonal patterns of the survey. We recommend focusing on the unemployment rate as the more consistent measure of what’s going on in the labour market.

As an indicator of spare capacity, Stats NZ also highlight the underutilisation rate. This held steady at 11.8% for the September quarter, and was down from 12.3% a year ago.

The Labour Cost Index (LCI) rose by 1.9% in the year to September. However, this includes the impact of the equal pay settlement for aged and disability care workers, which increased the wages of around 55,000 workers by as much as 28% (for those who were previously on the minimum wage).

Excluding this impact, the annual rise in the LCI was 1.6%, down from 1.7% in the June quarter. Labour cost inflation remains at or close to its cyclical lows, even as consumer price inflation has picked up over the last year.

Market implications

The New Zealand dollar rose 1/2 cent against the USD, and swaps were up 1 bp.

For the Reserve Bank, the surprises in today’s report are in the same direction as for us. The unemployment rate is a little lower than expected, but wage growth (excluding the care workers’ settlement) remains surprisingly weak."