THE BIG PICTURE: Our unemployment conundrum

One of the more contentious issues in Australian economics concerns the unemployment rate. Many people simply don’t believe that the unemployment rate stands at 5.2% – that is, it is far too low. Many contend that the definitions applied by the Bureau of Statistics are too narrow, especially the definition of employment.

On the definition applied by the ABS a person is employed if they were aged over 15 years and “worked for one hour or more for pay, profit, commission or payment in kind in a job or business, or on a farm (comprising employees, employers and own account workers)”. There are a few other aspects to the definition, but broadly that is it. And in general terms (again not the strict definition) a person is unemployed if they weren’t employed during the reference week and had actively looked for work or were waiting to start a new job.

Certainly we may debate whether one hour of work should constitute employment, but the important point is that the definition has been consistently applied over time. So if you consider that the definition of employment is far too narrow, the point is that this is broadly the same definition used over time.

Roy Morgan Research provides an alternate definition – that is, they conduct face-to-face interviews and apply the definition: “An unemployed person is classified as part of the labour force if they are looking for work, no matter when.

Based on the Roy Morgan estimates the unemployment rate stood at 8.6% in October – the highest level since March 2004. It also estimated that 7.1% of the workforce was underemployed. The total of unemployed and unemployed stood at 15.7% – the highest since December 2010.

The Bureau of Statistics also estimates under-employed workers, but on a quarterly basis. As at August the seasonally adjusted underemployment rate was 7.0% with the under-utilisation rate at 12.3% – the highest since November 2010 and close to the timing of the high for the Roy Morgan survey.

And then there are the Centrelink official figures of jobseekers receiving a Newstart or Youth allowance. The October figures were the lowest in three years.

The job market has indeed softened over the past year, but not dramatically. Employers aren’t taking on as many new workers, preferring to get existing workers to work longer hours. But it hasn’t got to the stage of Centrelink offices being bombarded with people queuing up for unemployment benefits.

The week ahead

It’s the last hurrah for major economic data for 2011. Over the coming week, no fewer than eight key indicators are released with a Reserve Bank Board meeting thrown in for good measure. In the US there is an uncustomary quiet week in prospect with the ISM services index the highlight.

In Australia, the week kicks off with a bevy of indicators on Monday. The Bureau of Statistics releases its Business Indicators series, containing data on industry sales, inventories, profits and wages. On the same day the Performance of Services index (PSI) is issued alongside job advertisements, tourism arrivals & departures and the monthly inflation gauge.

The track record of these indicators hasn’t been flash. Job ads have fallen for six out of the last seven months; the PSI shows that the services sector is contracting; and tourist arrivals are weak. But at least inflation is under control with the monthly inflation gauge growing at a 1.2% annual rate over the past six months.

The Reserve Bank Board meets on Tuesday. And to say that this will be an “interesting” meeting is an understatement. There are good reasons for the Reserve Bank to cut rates again. Inflation is contained, the non-mining sector is weak and the European Debt Crisis poses considerable risks. But the question is whether “tactically” it is a good decision to move now. Perhaps the Reserve Bank waits until February – especially given the RBAs view that the situation will get resolved one way or another over the next two months.

We think the RBA will hold off on another rate cut until February – but we don’t hold this view with supreme confidence. If we were in their shoes, we think Board members should elect to cut rates again on Tuesday. The quarterly balance of payments data is also issued on Tuesday together with government finance figures.

On Wednesday the Bureau of Statistics will release the September quarter National Accounts – containing the latest estimate of economic growth. The data is clearly ancient history. More recent data shows that the non-mining sector is struggling. But we estimate that the economy grew by 1.2% in the September quarter –more a reflection of the rebuilding following the floods and cyclones earlier this year.

And on Thursday the October estimates of employment and unemployment are expected. Employment probably grew by around 10,000 in the month – continuing the trend for job growth to match the number of new entrants to the workforce. The unemployment rate probably remained close to 5.2%. And with employers increasingly looking to get their employees to work longer hours, rather than take on new staff, the number of hours worked in the economy probably grew by 0.2% in October.

The Reserve Bank Governor delivers a speech on Thursday – when he talks, investors listen.

In the US, a relatively quiet week is in prospect for new economic data. On Monday October data on factory orders is released alongside the November ISM services index. Factory orders have followed a zig-zag path in recent months but annual growth is impressive – orders are up just over 10% on a year earlier. Hardly sounds like recession material.

Again the ISM services index stands comfortably above a reading of 50 – indicating expansion of the services sector. Another reading of close to 53.0 is tipped for November.

On Wednesday, consumer credit data is released together with the weekly mortgage market index. Credit is again expanding, up by just over 2% on a year earlier. With interest rates at unprecedented lows, consumers and businesses are embracing opportunities again rather than being sidelined by the risks.

The weekly data on new claims for unemployment insurance is released on Thursday together with wholesale inventories. While on Friday the October data on exports and imports is issued together with the University of Michigan’s closely watched consumer sentiment index.

The job market is clearly on the mend. Jobless claims are holding close to 400,000 – hovering near the lowest levels seen in three years – and an even better result when you consider population growth since that time. A trade deficit near US$43 billion is expected while data should confirm that consumer sentiment has lifted for the third straight month.

Sharemarket, interest rates, currencies & commodities

Is the sharemarket cheap or dear? It would be good to have a definitive way to answer the question, but sadly such an answer doesn’t exist. For instance some prefer to compare share prices to earnings, others prefer to compare prices to the book value of a company’s assets. Still, if you focus on share prices, then you are also missing out on the value provided by dividends – an increasingly important consideration for investors. Investors are also constantly weighing up the value of shares as an asset class compared with alternate investments such as bonds, property and cash (such as term deposits). And risk preferences change.

Currently the price earnings ratio for the All Ordinaries stands at 11.88. On any comparison over the past 27 years, this would suggest that shares represent good value. But back in the early 1980s, the PE ratio averaged closer to 10.0. Shares appear good value at present, but given reduced risk preferences, prices may merely be “fair” rather than “cheap”.

Craig James is chief economist at CommSec.