Unemployment to peak below expectations- Pete Wargent

More jobs added

The recession crowd seem to have become a bit disheartened of late as the economy has added 106,000 jobs in the first four months of the year implying that the unemployment rate may have peaked.

Total employment increased in the month of April by another 14,200 to 11,573,000:

Table 1: Total employed
In truth, taken alone the monthly figures are largely a waste of time since even the 95% confidence interval can only confirm that the economy might have lost 43,000 jobs or added 72,000 – almost no use whatsoever.

For that reason it makes more sense to get a feel for the trend. Below is the 5 year chart, which shows that 2014 has got off to a strong start after a lull in 2013:

Table 2: Total employed
New South Wales led the jobs growth for the month, which does nothing to change my opinion that NSW will become Australia’s economic powerhouse state

But in fact an objective assessment would tell you that the best performing state in this month’s data would have to be Queensland.

Whatever the unemployment rate data implies, Queensland has added the most jobs in the past 12 months thanks to its large resources projects, followed by Western Australia and New South Wales.

South Australia has actually shed 10,000 jobs over the past year which is concerning in a low interest rate environment, while the Victorian labour market in aggregate has been essentially flat over the past 12 months.

Unemployment rate by state 2014

End of easing cycle

General consensus therefore seems to be that low interest rates are biting and economic growth will begin to return upwards towards its long term trend which is great news for Australia.

A range of commentators wrote yesterday that this means that the unemployment rate will not get up to what had been forecast in the MYEFO at 6.25%, and that we can expect economic growth of 3% or more in 2015.

HSBC’s Paul Bloxham thinks we’ll get a rate hike by the end of 2014. AMP Capital’s Shane Oliver is looking for the first interest rate hike in Q3 or Q4 this year. Market Economics thinks even sooner than that. Futures markets think perhaps the middle of next year some time.

In other words, things are increasingly looking up, although consensus on timings remains uncertain.

The risks to the economy continue to lie in weakening construction activity, declining terms of trade and China’s deflating property bubble, as they have for some time.

A state comparison: New South Wales versus South Australia

Rather than churn out the same old same old each month, I try to look at something different each time.

It’s interesting to recall that a couple of years ago in some quarters I was referred to as foolish for suggesting that Sydney would be a stronger property market than Adelaide. But I had my reasons as

explained below.

I wrote in my book a couple of years back that “history suggests that Adelaide could continue to be the slow but steady performer”.

Interestingly, vacancy rates are quite low in Adelaide now and low interest rates are at last beginning to bite and housing prices look as thought they might threaten to get back to about where they were in 2009/2010, although they remain well down in real terms.

House prices

Of course, when assessing data, you have to look at a whole range of factors. One example, Greater Sydney’s population increased by 81,000 in 2013 which is a lot when compared to the 13,000 added in Greater Adelaide.

Population growth 2013

That’s an oversimplification of course, but there is an important underlying point here.

I mention this in this post because the most important data of all in economics is often seen to be the employment/unemployment figures for reasons I’ve explained previously on this blog.

Strong employment data tends to have positive impacts on other economic data.

In the simplest terms of the significance of employment data to real estate trends, well, most people who aim to buy property need a job to do so, so it’s kinda crucial.

Here is the total employment chart, seasonally adjusted, for New South Wales and South Australia over the long run.

Total employed- NSW vs SA
Over the long haul, while South Australia has failed to even add 250,000 jobs, New South Wales has added more than 1.5 million. More than six times as many total employed across the data span.

Now I sense what you may be thinking – this is a meaningless stat. And with no context it is, but bear with me.

Let’s zoom in a bit and consider recent cumulative jobs growth in the two states. The past decade might be a reasonable sample of time to consider:

10 year cumulative jobs addedWhat’s happening here?

New South Wales has added around half a million jobs over the past decade while South Australia is now going backwards.Why?

Large cities are different

I wrote a short piece here on Zipf’s Law which considers why I invest in property in the large cities like Sydney and London, which is that large cities become more sustainable, increasing aggregate demand over time, particularly for well located land:

“Clearly in part, this is because large cities tend to expand via immigration, and the largest cities tend to attract immigrants seeking jobs and opportunities.

In Britain many immigrants often used to head to London simply because they knew of nowhere else to go.

It’s also partly about economics: the largest cities produce the most wealth and therefore the populations tend to expand accordingly.[sam id=40 codes=’true’]

Remember that Zipf’s law also applies to to income distribution, We often find that the largest cities are home to both the richest (as well as many of the poorest) people in any given country.

In spite of the above, more detailed research has found that the Zip’s Law relationship between the population sizes of cities tends to break down where the cities in question are not integrated economically. This suggests that the law must be something to do with the way in which economies work.

Large cities become more sustainable

It’s tremendously exciting to live in a city like Sydney where the population is growing at around 80,000 people per annum, since the city is constantly changing before your eyes.

It’s almost impossible to imagine how Sydney might look in the future as the population rockets towards 8.5 million over the coming decades, but there will certainly be lots of new building to be done.

When the population of a city grows, immigrants can’t simply move in and start living.

We have to build more houses and apartments. We have to build more schools, more transport hubs, more playgrounds, doctors’ surgeries, restaurants, cafes, supermarkets, shopping centres, car parks, gyms, infrastructure and more service stations.

This in itself creates more construction work and economic output.”

Macro versus micro

Clearly the jobs data is part of the macro picture and while it may indicate that jobs growth is going backwards in South Australia in aggregate, it doesn’t tell us much about what’s happening to the labour market in, say, Port Augusta.

Each to their own of course, but while investing in these small towns can give property owners a short term equity boost, it’s not a strategy I would advocate because what I saw when driving around was (literally) lots of residential land for sale.

I’d far rather own property in the cauldron of inner/middle suburbs of Sydney and London.

The markets certainly still ebb and flow a bit, but the long term outcomes are comfortably superior as the large cities attract and generate more wealth and real income growth.

What I see happening in Sydney mirrors what has played out in London over the years.

People will continue to run affordability matrices and so on, but demand in the inner suburbs of Sydney and supply so muted that prices can be pushed well beyond what a median salary income suggests should be the case.

Many of us who own in these suburbs don’t buy with salary income in any case, rather with equity gains from inheritance, from share market investments, through business ventures or via other investment properties held for the long term.




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is a Chartered Accountant, Chartered Secretary and has a Financial Planning Diploma. Using a long term approach to building businesses, investing in equities, & owning a portfolio he achieved financial independence at the age of 33. Visit his blog

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