The unemployment riddle

Economics is supposed to be the dismal science, but I reckon there are quite a few economists in Australia with a real sense of theatre.

When economists get their modelling wrong and a bit of data shows this, they are very quick to point out how shocked we should all be – although they do it in the nicest economist-speak, of course.

And so it was with yesterday’s very unexpected jump in unemployment. Economists had expected the jobs markets to add 10,000 jobs in July, but employment actually fell by 100 people, with full-time jobs down by 22,000.

“There are clear signs that the Aussie economy is fast losing momentum. Jobs growth is now stagnant, adding to data showing stagnant retail spending, weak housing market and lacklustre activity in manufacturing, services and construction sectors,” CommSec’s Craig James said yesterday.

The bigger worry is that employment growth is at 15-month lows and as ANZ warned, if the trend continues the jobless rate could rise from yesterdays 5.1% to 5.6% in just six months.

Certainly a big rise in the unemployment rate would be bad news for economic growth. Nothing hurts consumer confidence more than fears about job security, although exactly how further confidence could fall remains a question.

A jump in the unemployment rate could also hurt the property market, although if the RBA was forced to cut rates in response to rising unemployment this could support housing.

Most economists are now tipping that the jobless rate will hit 5.5% in 2012 as the economy continues to slow in the next few months.

Smart companies do need to watch the next few months of employment data closely – as bank chiefs have said this week, it’s the key statistic right now.

If unemployment does rise, spending will not – and the pressure will mount for rate cuts.

But we should also keep the jobless rate in perspective. It is worth remembering that that is still reasonably low (remember, US unemployment is above 9%) and we didn’t actually get much higher than 5.5% during the GFC.

As Craig James says: “While businesses are likely to pull back hiring plans due to the uncertain environment, it is unlikely that significant job losses are around the corner.”

I agree. I can see companies holding back on hiring decision, but given the fact we still hear concerns about skills shortages, mass lay-offs are very unlikely at this stage.