Australia: Job gains

ABS June figures reflect solid gains for the labor market. Justin Smirk at Westpac writes:

“….The annual pace of employment growth has lifted from 0.9%yr in February to 2.0%yr in May and it held that pace in June. In the year to Feb there was a 106.9k gain in employment; in the year to June this has lifted to 240.2k. The Australian labour market went through a soft patch in 2016 that was particularly pronounced through August to November when the average gain in employment per month was a paltry 2.2k. We have clearly bounced out of this soft patch and now holding a firmer trend.”

My favorite measure, monthly hours worked, jumped (year-on-year) by 3.1%.

Monthly Hours Worked

Infrastructure spending, particularly in NSW and Victoria, is doing its best to offset weakness in other areas.

Wage rate growth remains subdued, indicating little pressure on the RBA to lift rates.

Monthly Hours Worked

Australia: RBA hands tied

Falling wage rate growth suggests that we are headed for a period of low growth in employment and personal consumption.

Australia Wage Index

The impact is already evident in the Retail sector.

ASX 300 Retail

The RBA would normally intervene to stimulate investment and employment but its hands are tied. Lowering interest rates would aggravate the housing bubble. Household debt is already precariously high in relation to disposable income.

Australia: Household Debt to Disposable Income

Like Mister Micawber in David Copperfield, we are waiting in the hope that something turns up to rescue us from our predicament. It’s not a good situation to be in. If something bad turns up and the RBA is low on ammunition.

Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery. The blossom is blighted, the leaf is withered, the god of day goes down upon the dreary scene, and — and in short you are for ever floored….

~ Mr. Micawber in Charles Dickens’ David Copperfield

Inflation surges

Inflation is rising, with CPI climbing steeply above the Fed’s 2% target. But core CPI excluding energy and food remains stable.

Consumer Price Index

Job gains were the lowest since May 2016.

Job Gains

But the unemployment rate fell to a low 4.5%.


Hourly wage rate growth has eased below 2.5%, suggesting that underlying inflationary pressures are contained.

Average Hourly Earnings Growth

The Fed is unlikely to accelerate its normalization of interest rates unless we see a surge in core inflation and/or hourly earnings growth.

Australia’s economic growth is slowing.

Employment and Participation rates are falling.

Australia Employment & Participation Rates

Wage rate growth is slowing.

Australia Wage Rates

Slowing wage rate growth and inflation confirm that the economy is faltering.

Australia Underlying Inflation

The RBA, with one eye on the housing bubble, has indicated its reluctance to cut rates further. Increased infrastructure spending by Federal and State governments seems the only viable alternative.

With the motor industry winding down and apartment construction headed for a cliff, this is becoming increasingly urgent.

US Job Growth, Wage Rates & Inflation

Payrolls jumped by a seasonally adjusted 235,000 jobs in February, setting the Fed on track for another rate rise next week.

US Job Growth

GDP growth is projected to lift in line with employment, wage rates and hours worked. At this stage, the Fed is still attempting to normalize interest rates rather than slow the economy to cool inflationary pressures.

Projected GDP

Wage rate growth remains muted, at close to 2.5 percent, so rate hikes are likely to proceed at a gradual pace.

Hourly Wage Rates and Money Supply

The need to tighten monetary policy is only likely to be seriously considered when wage rate growth [light green] exceeds 3.0 percent [dark green line]. Then you are likely to witness a dip in money supply growth [blue], as in 2000 and 2006, with bearish consequences for stocks.

*The dip in 2010 was a mistake by the Fed, taking its foot off the gas pedal too soon after the 2008 crash.

Are corporate profit margins sustainable?

Market capitalization as a percentage of (US) GNP is climbing and some commentators have been predicting a reversion to the mean — a substantial fall in market cap.

US Market Cap to GNP

But corporate profits have been climbing at a similar rate.

US Corporate Profits to GNP

Wages surged as a percentage of value added in the first quarter (2014) and profit margins fell sharply, adding fresh impetus to the bear outlook. But margins recovered to 10.6% in the second quarter.

Employee Compensation and Profits as Percentage of Gross Value Added

Further gains in the third quarter would suggest that profits are sustainable. Research by Morgan Stanley supports this view, revealing that improved profit margins are largely attributable to the top 50 mega-corporations in the US:

Mega cap companies (the largest 50 by size) have been able to pull their margins away from the smaller companies through globalization, productivity, scale, cost of capital, and taxes, among other reasons. We argue against frameworks that call for near-term mean reversion and base equity return algorithms off the concept of overearning. Why? The margins for the mega cap cohort in the last two downturns of 2001 and 2008 were well above the HIGHEST margins achieved during the 1974-1994 period. To us, this is a powerful indication that the mega cap cohort is unlikely to mean revert back to the 1970s to 1990s average level.

(From Sam Ro at Business Insider)

Also interesting is The Bank of England’s surprise at the lack of inflation in response to falling unemployment. One would expect wage rates to rise when slack is taken up in the labor market, but this has failed to materialize. It may be that unemployment is understated — and a rising participation rate will keep the lid on wages. If this happens in the US it would add further support for sustainable profit margins.

The Magical World Where McDonald’s Pays $15 an Hour? It’s Australia | The Atlantic

Jordan Weissmann compares wages paid to McDonalds workers in Australia and the US, raising four interesting points.

Firstly, McDonalds (or “Maccas” if we use its colloquial name in Australia) is profitable in both low-wage and high-wage countries:

The land down under is, of course, not the only high-wage country in the world where McDonald’s does lucrative business. The company actually earns more revenue out of Europe than it does from the United States. France, with its roughly $12.00 hourly minimum, has more than 1,200 locations. Australia has about 900.

They achieve this partly through higher prices, but also through adjusting their staff structure in Australia.

The country allows lower pay for teenagers, and the labor deal McDonald’s struck with its employees currently pays 16-year-olds roughly US$8-an-hour, not altogether different from what they’d make in the states. In an email, Greg Bamber, a professor at Australia’s Monash University who has studied labor relations in the country’s fast food industry, told me that as a result, McDonald’s relies heavily on young workers in Australia. It’s a specific quirk of the country’s wage system. But it goes to show that even in generally high-pay countries, restaurants try to save on labor where they can.

They also focus on increased productivity.

It stands to reason that in places like Europe and Australia, managers have found ways to get more mileage out of their staff as well. Or if not, they’ve at least managed to replace a few of them with computers. As Michael Schaefer, an analyst with Euromonitor International, told me, fast food franchises in Europe have been some of the earliest adopters of touchscreen kiosks that let customers order without a cashier. As always, the peril of making employees more expensive is that machines become cheaper in comparison.

That is one of the primary dangers of high minimum wages: automation is used to improve employee productivity and shrink the required workforce. Shrinking the national wage bill might seem like good business sense, but if we look at this on a macro scale, reduced incomes lead to reduced consumption and falling sales.

Finally, McDonald’s have attempted to add value to their product range, moving slightly more up-market in order to capture higher prices.

McDonald’s has also helped its bottom line abroad by experimenting with higher margin menu items while trying to court more affluent customers. Way back in 1993, for instance, Australia became home to the first McCafe coffee shops, which sell highly profitable espresso drinks. During the last decade, meanwhile, the company gave its European restaurants a designer make-over and began offering more localized menus meant to draw a higher spending crowd.

If we take McDonald’s as a microcosm of the entire economy, the trade-offs and benefits (or lack thereof) are evident. Funding wage hikes out of increased prices (for the same quality products) is futile. It adds no benefit: the increased wage is eroded by higher prices. Reduced wages for younger workers simply disadvantages older workers, excluding them from certain jobs. Increased productivity — higher sales per employee — on the other hand, can benefit the entire economy.

Improved training or increased automation may increase output, but run the risk of shrinking the jobs pool — unless new jobs created in training or manufacturing are sufficient to offset this. Product innovation, on the other hand, is an immediate win, raising sales while encouraging job growth in new support industries.

How do we encourage product innovation? Higher minimum wages is not the answer. Nor, on its own, is increased investment in research and education. What is needed is a focus on international competitiveness: reducing red tape, ensuring basic goods and services such as electricity, water, shipping and transport are competitively priced, lowering taxes and stabilizing exchange rates. That would encourage the establishment of new industry locally rather than exporting skills and know-how to foreign shores. We need a culture of innovation and entrepreneurship, rather than lip-service from politicians.

Read more at The Magical World Where McDonald's Pays $15 an Hour? It's Australia – Jordan Weissmann – The Atlantic.

Labor Shortage May Help China Adjust to Slower Growth –

Reflecting the tight labor market, wage income for urban households rose 13% year-on-year in the first half, and average monthly income for migrant workers rose 14.9%, according to data from China’s National Bureau of Statistics…… At current rates, China’s private-sector manufacturing wages will double from their 2011 levels by 2015, and triple by 2017, eroding competitiveness and denting the exports that have played a key part in China’s early growth.

via Labor Shortage May Help China Adjust to Slower Growth –

Comment:~ It makes you question official inflation figures of just 2.2 percent when wage increases are significantly higher.