Australian employment
grew for a seventh consecutive month
in April, recording
another hefty increase in the process.

Jobs surged by 37,400 in seasonally adjusted terms, smashing
expectations for an increase of 5,000.

With employment growing faster than expected, the unemployment
rate tumbled 0.2% to 5.7%, leaving it at a four-month low.

The March result, previously reported as a gain of 60,900, was
revised fractionally lower to an increase of 60,000.

Taking some of the gloss off the headline result, the ABS
reported that monthly hours worked fell by 4.3 million hours to
1.6595 billion hours in seasonally adjusted terms. The decline
was driven by a drop in full-time hours worked of 0.5%, partially
offset by a lift in part-time hours of 0.7%.

This, despite the recent recovery in hiring, will raise questions
over the level of slack that exists within the labour market at
present.

Of course the question is can Australia sustain the job addition
momentum and will the level of slack recede>

We start with JPMorgan.

Ben Jarman, JPMorgan

With today’s snap-back, the unemployment rate is now in line with
our quarter-end forecast for 2Q, and for year-end, so we don’t
expect any further improvement from here.

Today’s result similarly does not change the likelihood of very
weak household income and wage performance over the medium term,
which underpin the outlook for inflation. For the RBA, a 5.7%
unemployment rate is still too high, and is unchanged over the
last year.

The composition of the labour data is also poor, so while the
staff estimate NAIRU (non-accelerating inflation rate of
unemployment) in the low 5s, that may still be too high, given
the underemployment issue and the fact that wage growth has been
consistently weaker than the level of the unemployment rate would
normally suggest.

We are also wary of the significant tests that lie ahead for the
labour market, given that housing is so late-cycle. Unemployment
is currently very low in New South Wales for example, which has
heavy exposure to the financial/housing dynamics. Still, today’s
result does provide some breathing space relative to the RBA
staff’s 5-6% forecast band for unemployment. The lack of an acute
unemployment shock in the near term supports the Board’s clear
preference for a gradual return of inflation to target, though we
still view the bias as being to lower rates over time, given
festering weakness in wages and inflation.

David Plank, ANZ

Employment was up strongly in April, following on from the very
strong result for March. The full-time/part-time split was
somewhat less positive. The drop in the unemployment rate to 5.7%
confirms the overall strength of the report in our view. We think
we are likely to see a series of strong employment reports over
coming months as the official data closes the gap that had opened
up with the strong labour market signals coming from other data.
This may act to stem the decline in consumer confidence that has
been apparent since the start of the year.

Given the strength of labour market indicators from sources such
as business confidence and ANZ Job Ads we are not overly
surprised by the strength of the April jobs report, even if it
was above our forecast. We think this could continue for a while
yet, hopefully stemming the trend decline in consumer confidence
seen since the start of the year.

Su-Lin Ong, RBC Capital

A decent labour force survey for April, with the strengthening
employment trend likely to please the RBA. Continued weakness in
hours worked, however, bears watching as it tries to assess how
much spare capacity is in the labour market. Coupled with mixed
activity data, the labour market dynamics sit with a central bank
on hold for some time.

The April outcome confirmed a pick-up in the pace of employment
generation that has been under way since late last year. The
average monthly pace of job creation has stepped up over the last
six months. Of note, this has been mostly driven by full-time
jobs (~60%) in contrast to the prior six months with a much
weaker pace of monthly job creation and a contraction in
full-time employment during this period. The recent pace of job
creation is enough to put some downward pressure on the
unemployment rate and begin to absorb some excess capacity. The
only worrying aspect is the weak trend in hours worked, which
appears consistent with the still elevated levels of
underemployment. This remains important in terms of capacity
considerations and also consistent with the continued weak pace
of wages growth.

The firmer state of the labour market likely reflects the
stronger patch of growth in Q4 2016 and early this year amid a
firmer global backdrop and increased optimism. For the RBA,
today’s data will be welcomed and may give it a little more
confidence in its expectation for a return to above-trend growth.
We are less confident that growth will be maintained at the pace
of late 2016, especially as the housing construction cycle peaks
later this year, consumers remain cautious, and non mining
investment stays modest.

While the May minutes also suggested that the RBA was less
concerned about the full-time/part-time composition of employment
generation (see our note from earlier this week), we doubt that
the hours worked data will have escaped its attention as it
grapples with trying to assess the degree of spare capacity in
the labour market. This remains key given the stagnant pace of
wages growth and implications for already sub-target inflation.

Gareth Aird, CBA

Once again the ABS has published an employment report that has
left us scratching our heads. To put these numbers in
perspective, it’s the equivalent of a 1.2 million increase in US
non farm payrolls over two months! To further add to our concerns
over the data, total hours worked is reported to have fallen by
0.3% in April and is down by 0.1% over the past two months
despite employment having risen by 97,400.

The April RBA Board Minutes, published on Tuesday, contained a
detailed discussion on recent trends in the labour market. In
particular, a few paragraphs were devoted to the Board’s
assessment of the composition of employment growth. Members
concluded that, “the distinction between full time and part time
work had become less important in assessing labour market
conditions.” We beg to differ. And as luck would have it, we
published a detailed research piece back in August, which
explains why.

It is true that the distinction between full time and part time
employment is arbitrary and the line in the sand is drawn at
35hrs. But it is no coincidence that the upward trend in
underemployment over the past few years has coincided with an
acceleration in the trend towards part time employment.

There is often a perception that full time jobs are “good” and
part time “ok” when it comes to the employment data. But in our
view, both full time and part time jobs are equally as “good”,
provided that workers in part time employment don’t want to work
full time. If a worker chooses part time employment they are not
underutilised – they are simply displaying a preference to work
fewer than 35 hours a week. However, growth in part time
employment, rather than full time work, becomes a problem (and
indeed undesirable) when there is growth in the number of workers
who are not working as much as they would like. This is captured
in the underemployment rate which is at its highest level on
record.

The monetary policy dial is unaltered by today’s numbers. The
cash rate remains on hold unless the labour market falters or
there is a material slowing of activity in the housing market

Shane Oliver, AMP Capital

The strength in jobs growth is to be welcomed and suggests that
jobs growth is heading back towards the solid pace indicated by
forward looking jobs indicators (like job ads, vacancies and
hiring intentions from the NAB survey). As combined in our Jobs
Leading Indicator these forward looking indicators continue to
point to strong jobs growth ahead (although it has been
overstating jobs growth a lot lately).

April’s jobs data is consistent with Reserve Bank expectations
and so on its own is consistent with interest rates remaining on
hold. The risk though is that weakness in retail sales (on the
back of subdued consumer confidence and weak wages growth) and
weaker growth in housing construction will start to impact
employment growth down the track. Fortunately, forward looking
jobs indicators are continuing to hold up at present suggesting
reasonable jobs growth ahead.

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