Household Labour Force Survey (Q2 2001)

Key Points

- The Household Labour Force Survey (HLFS) confirmed the very strong Q2 labour market performance portrayed by last week’s Quarterly Employment Survey (QES).

- Employment rose 0.9% qoq in Q2 following a revised increase of 0.1% qoq in Q1. The level of employment was 3.2% higher than a year earlier. This result was well above the median market expectation of +0.3% qoq.

- Full-time employment rose 0.2% to be 3.4% higher than a year earlier. Part-time employment increased 3.5% qoq to be 2.7% higher than a year earlier.

- On a full-time-equivalent basis (one full-time worker equals two part-time workers) employment rose by 0.6% qoq and 3.3% yoy - broadly in line with that suggested by last week’s QES.

- On an industry basis, strong growth was recorded in the following sectors: agriculture; transport, storage and communication; education; and health and community services. The construction sector reported a further decline in employment, suggesting that spare capacity has so far been available to drive the emerging recovery in that sector. Sector data is volatile and should be treated with caution.

- On a regional basis, there was further evidence that the recovery is broadening to the urban areas. The Auckland region recorded particularly strong growth (employment in Q2 was over 6% higher than a year earlier).

- The number of total hours worked rose 0.3% qoq in Q2 to be 3.1% higher than a year earlier.

- The unemployment rate fell to 5.2% to (from 5.4% in Q1). This is the lowest unemployment rate since June 1988 when 5.2% was also recorded.

- The participation rate increased to 65.9% - the highest level since Q3 1996 - from 65.6% in Q1. Had the participation rate not increased, the unemployment rate would have fallen well below 5%.

- Around two-thirds of the reduction in the level of unemployment over the past year has been met by a reduction in those persons classed as long-term unemployed (unemployed for 6 months or longer). This suggests that the structural rate of unemployment is likely to have fallen over the past year, thus moderating the potential inflationary impact (although independent indicators unambiguously point to a very tight labour market).

- Market reaction: The September bill contract sold off 2 ticks following the release of the data. The market now assesses a less than 5% chance of a rate cut by the RBNZ at next week’s OCR review.

Employment and the Unemployment Rate Employment, Hours Worked and GDP

Source: DB Global Markets Research, Statistics NZ Source: DB Global Markets Research, Statistics NZ

Comment

- Both the HLFS and QES suggest that, following a pause in Q1, employment growth has resumed the strong trend evident during H2 2000. Together with the increase in hours worked/paid, this supports our view that overall economic activity grew by around 1.0% qoq in Q2, if not marginally stronger. Therefore, we think that the RBNZ’s concerns about the level of momentum in the economy - raised by the weak Q1 GDP result - have been dismissed convincingly.

- The labour market remains very tight. The fall in the unemployment rate to 5.2% is consistent with the further surveyed measures of skill shortages and with the strengthening trend in wage growth reported both anecdotally and in last week’s QES and Labour Cost Index. While the decline in long-term unemployment remains very encouraging and bodes well for New Zealand’s longer-term economic health, it has not been sufficient to prevent an overall tightening of labour market conditions. Moreover, it seems reasonable that the productivity of the previously long-term unemployed may be somewhat lower than the existing workforce (at least initially).

- Today’s data supports our view that the RBNZ will give greater weight to the concrete evidence from strong domestic data and the consequent inflation risks, and therefore refrain from easing further on 15 August. With two further opportunities left this year to shift rates downward if needed, we see little imperative to ease policy at this point.

- We think that the chance of a further 25bps cut on 15 August has reduced further and is now no higher than 20%. We expect the next poll of market economists to show a marked reduction - if not total abandonment - of support for a rate cut next week. As recently as a fortnight ago, half of surveyed economists expected a cut. The market has been working with a much lower probability for some time.

- We continue to think that the next move in interest rate settings will be a hike, most likely at the time of the March 2002 Monetary Policy Statement.

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