Strong rise in unemployed men lifts unemployment above expectations

Seasonally adjusted unemployment rose to 6.8% in the June quarter from 6%, outstripping economists' and Reserve Bank expectations. The jobless rate was lifted by an increasing number of unemployed young men.

This prompted some economists to suggest the Reserve Bank may now pause its plans for further hikes in the Official Cash Rate (OCR) from its current level of 3%. Its next decision is due on September 16.

Markets reacted by pushing longer term wholesale interest rates and the New Zealand dollar sharply lower in anticipation the OCR may peak below 4%, well below the 6% peak seen as recently as June.

(Updates add figures for numbers of unemployed men and women, BNZ senior economist Craig Ebert's comments about the RBNZ 'appearing to go weak at the knees', ASB economist Jane Turner's reducing her peak OCR forecast to 5.5% from 6%, Westpac economists' view that RBNZ will pause in December, moves down in the NZ dollar and swap rates, ANZ seeing a 50% chance of a pause in September).

Statistics New Zeland said in its Household Labour Force Survey (HLFS) the total number of people unemployed climbed by 19,000, or 13.9%, to reach 159,000 in the June quarter.

The consensus of economists' expectations was for a rate of 6.4% with the Reserve Bank expecting 6%.

The rise unwinds much of the 1.1% drop in unemployment recorded in the March quarter, indicating a period of volatility in the labour market.

"As with the fall in the March quarter's unemployment, the rise this quarter was largely unexpected, and reflected movements among younger males," Peter Gardiner, Statistics New Zealand's manager of labour market statistics, said.

 The number of unemployed men rose by 15,000, or 21.2%, to 86,000, with the number of unemployed women up by 4,000, or 6.4%, to 74,000.

Gardiner noted there had been recent fluctuations in both employment and unemployment, which can occur during periods of major change in the labour market. These movements indicated the labour market was still adjusting to a changing economic climate.

”The recent volatility in unemployment estimates is making it more difficult to interpret the results. The underlying or trend unemployment rate, which excludes seasonal and unexpected changes can be used to help understand labour market conditions," said Gardiner.

At 6.7 percent, Gardiner said the trend unemployment rate has been relatively flat since September 2009.  But, in the last year, growth in the working-age population has out-stripped employment growth.

"This, coupled with relatively high and stable labour force participation during the year has kept unemployment up."

Meanwhile, employment fell by 6,000 in the June quarter, after a 21,000 increase last quarter.

The Household Labour Force Survey results are based on a representative sample of 15,000 households throughout New Zealand. The survey is designed to produce estimates of the numbers of people employed, unemployed, and not in the labour force.

'Weak at the knees'

BNZ senior economist Craig Ebert said the figures were not that disappointing and markets may have overshot with driving down of expectations about the future peak level of the OCR.

"This morning's Q2 Household Labour Force Survey (HLFS) was unequivocally weaker than expected. However, it would be dead wrong to conclude that it says the economic recovery is stalling, which seems to be what the market is now pricing for the OCR," Ebert said.

"We retain our view of ongoing economic recovery and gradual normalisation of New Zealand interest rates," he said.

"It would be dead wrong to conclude the Q2 HLFS says the economic recovery is stalling, which seems to be what the market is now pricing for the OCR."

Ebert said the new 'neutral' for the OCR was probably now below 5%, "simply because of the higher funding costs for banks, which has driven a sustained wedge between wholesale and retail rates."

"However, to assume the OCR peaks with a three in front of it, as the markets are now doing, in effect, is surely a lurch too far downwards on the estimated equilibrium level. Either that or the markets are expecting the economic recovery to stall, such that the cash rate will get stuck below neutral. We’re not inclined to believe either scenario (let alone the inconsistencies inherent in each of them)."

Ebert said BNZ retained its view the RBNZ should keep nudging the OCR upwards over the coming few meetings, then slow the pace to one hike per quarter through next year, toward a 5.5% peak around the end of next year.

"Its commentary of last week leaves the impression that it is starting to go wobbly at the knees. For this reason, we judge the odds for another rate hike at the 16 September MPS are now close to fifty-fifty (having ascribed 70% odds prior to the HLFS), and that there is a risk the RBNZ takes a carving knife to its GDP and inflation projections, and an axe to its 90-day bank bill yield track, for its September MPS."

 "The big question is whether the Reserve Bank will downgrade its GDP, inflation, and OCR outlook nearly as much as the markets have already implicitly done. We don’t believe it will. It certainly shouldn’t."

'Significantly weaker than expected'

ASB Bank economist Jane Turner said the data was significantly weaker than expected, with employment declining 0.3% during the second quarter compared to expectations of a 0.4% increase. The decline  was driven by a fall in part-time employment, with full-time employment actually up slightly.

"Looking at the past year or so, full-time employment shows a clear upward trend, while part-time employment has been trending down," Turner said.  "This indicates that the recovery in employment demand over the coming year will be sustainable, given firms tend to turn to hiring part-time staff when they want the flexibility to change headcount at short notice."

The New Zealand dollar fell sharply from US73.5 cents just before the unemployment figures were released to US72.9c a few minutes after.

Turner noted domestic interest rates also fell sharply, with the 1-year swap rate down around 10 basis points immediately after the data release. She said markets were currently pricing in a 65% chance of an Official Cash Rate (OCR) increase in September.

Overall, Turner added, the Statistics New Zealand data suggest the recovery in labour demand was more gradual than previously thought.  

"We see today’s figures, coupled with further decline in dairy prices, as enough to put the Reserve Bank on hold later this year for a few months," said Turner.

"The Reserve Bank expected the unemployment rate to remain at 6% in June and trend down from there, yet the rate has rebounded and appears unlikely to track as low as the Reserve Bank’s forecasts.  Significantly for inflation, the Reserve Bank’s view of future wage pressures will be dialed back.  It was also evident in the tone of last week’s OCR statement that softness in recent data was denting the Reserve Bank’s optimistic growth outlook.  The labour figures and the strong likelihood Fonterra will revise down its dairy payout will cast even more doubt on that outlook."

ASB economists still expected the Reserve Bank to hike again in September but to then hold fire in both October and December, with OCR increases beginning again in January.

"In addition, we now expect a 4.5% OCR peak in 2011, down from 5%," Turner added.

'Pause in December'

Westpac's economists said the Reserve Bank would have been wary before today's data of the risk that rapidly declining unemployment could provoke early wage rises and higher inflation.

"That risk has disappeared. With decent spare capacity in the labour market, it now seems unlikely that wages will drive higher in the near term. This reduces the apparent pressure on near term inflation. We expect the Reserve Bank will react to news of the weaker labour market by signalling that the pace and extent of OCR hikes will be more moderate," Westpac said.

"That said, we still expect the OCR will be hiked by 25 basis points in September and October. And we still expect the September MPS to outline a plan for returning the OCR to more normal levels," it said.

"We now expect the RBNZ will operationalise its "slower pace" idea by pausing after the first 100 basis points of OCR hikes. We are pencilling in pauses for the December and January OCR reviews, although we are not wedded to that timing."

The two year swap rate fell 10 basis points to 3.95%.

'Sitting on the fence'

ANZ economist Mark Smith said he was unclear on whether the RBNZ would hike on September 16.

"We now think the odds of the RBNZ hiking in September have fallen to 50:50. Based purely on recent developments, including today's HLFS results and what appears to be a pending downward revision to the dairy payout, a pause seems more than likely," Smith said.

"However, looking back at the RBNZ's assessment last week and their repeated comments towards interest rates being very supportive, prospects appear tilted towards getting another hike in despite what is obviously going to be a very challenging PR exercise. For now we are going to sit on the fence somewhat in relation to whether they go in September or not," he said.

"What will get us off the fence will be forthcoming developments in the global economy and what we see in key domestic leading indicators such as business confidence."