RBA Rates Decision & Roy Morgan Unemployment

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The RBA’s deci­sion not to reduce rates this month caught most pun­dits by surprise—including me. Giv­en the inter­na­tion­al and local data, I thought they’d err on the side of cau­tion and cut rates.

As I always note when asked to call what the RBA will do next, this is a call on how anoth­er body will respond to what they per­ceive as the eco­nom­ic data and the direc­tion their mod­el of the econ­o­my pre­dicts the actu­al econ­o­my will move in. That’s clos­er to pick­ing which cock­roach is going to walk out of a cir­cle first in a Chan­gi prison gam­bling den than it is to eco­nom­ic fore­cast­ing per se (which is dubi­ous enough activ­i­ty in itself). So mak­ing a wrong guess about what the RBA will do is not the same as mak­ing a wrong eco­nom­ic fore­cast; you’re just mak­ing a dif­fer­ent fore­cast of the future than is the RBA.

The RBA’s expla­na­tion for its deci­sion shows that it is mak­ing a rosy call of both the cur­rent data and the direc­tion in which the Aus­tralian econ­o­my is head­ed.

Infor­ma­tion on the Aus­tralian econ­o­my con­tin­ues to sug­gest growth close to trend… the unem­ploy­ment rate increased slight­ly in mid year, though it has been steady over recent months… In under­ly­ing terms, infla­tion is around 2½ per cent… the Bank expects infla­tion to be in the 2–3 per cent range.

Cred­it growth remains mod­est, though there has been a slight increase in demand for cred­it by busi­ness­es. Hous­ing prices showed some sign of sta­bil­is­ing at the end of 2011, after hav­ing declined for most of the year. The exchange rate has risen fur­ther, even though the terms of trade have start­ed to decline … With growth expect­ed to be close to trend and infla­tion close to tar­get, the Board judged that the set­ting of mon­e­tary pol­i­cy was appro­pri­ate for the moment.

As the Syd­ney Morn­ing Her­ald edi­to­ri­alised, the RBA mes­sage was that the future looks good:

MOVE right along folks. Noth­ing to see here. By keep­ing inter­est rates on hold this week, the Reserve Bank is send­ing a sub­con­scious mes­sage to bor­row­ers: the econ­o­my is doing rea­son­ably well. There is no need to pan­ic…

Although we in NSW seem bogged Eey­ore-like in our sad and dank lit­tle cor­ner of the for­est, glum­ly chew­ing our this­tles day after day, per­haps we real­ly ought to cheer up. Gloom is not just mis­er­able in itself. When it comes to the econ­o­my, it’s dan­ger­ous.

This is not the take that the major­i­ty of eco­nom­ic pun­dits have on the data—and for once, I’m with the major­i­ty. Nor­mal­ly the major­i­ty is bull­ish (because they have a Neo­clas­si­cal per­spec­tive on the econ­o­my that large­ly ignores cred­it, and thinks the econ­o­my always returns to equi­lib­ri­um) and I’m bear­ish (because I have a “Post Key­ne­sian” per­spec­tive that sees cred­it as the key motive eco­nom­ic force, and believes the econ­o­my is always in dis­e­qui­lib­ri­um).

The major­i­ty of eco­nom­ic pun­dits lined up with me for a change because there was a range of data that implied the econ­o­my was stalling. First­ly, unem­ploy­ment has been trend­ing up, and the “steady over recent months” phe­nom­e­non that the RBA referred to above was entire­ly due to a fall in the par­tic­i­pa­tion rate. Had this remained at the Novem­ber lev­el, the ABS unem­ploy­ment rate would have jumped to 5.6% last month.

Fig­ure 1

And that’s the good news: as was wide­ly report­ed, employ­ment fell by almost 30,000 last month, so that net job growth in 2011 was zero—the worst out­come in 20 years.

Sec­ond­ly, a broad­er mea­sure of unem­ploy­ment main­tained by Roy Mor­gan Research hit 10.3 percent—5 per­cent above the ABS fig­ure. The ABS treats some­one who has worked for one hour in the pre­vi­ous two weeks as employed, a def­i­n­i­tion that Roy Mor­gan right­ly rejects:

Sure­ly if some­one is not work­ing, is look­ing for work and con­sid­ers them­selves to be unem­ployed, then they should be con­sid­ered unem­ployed regard­less of whether they hap­pen to have done a cou­ple of hours work here and there dur­ing the month?”

The ludi­crous offi­cial def­i­n­i­tion of unem­ploy­ment is a clas­sic case of bureau­cra­cies (includ­ing the Unit­ed Nations Inter­na­tion­al Labor Orga­ni­za­tion in this case) elim­i­nat­ing a prob­lem by redefin­ing it rather than solv­ing it. Many peo­ple have crit­i­cised this def­i­n­i­tion (includ­ing Peter Brain from the Nation­al Insti­tute for Eco­nom­ic and Indus­try Research, who found that over a dozen offi­cial rede­f­i­n­i­tions of unem­ploy­ment had all reduced the record­ed lev­el); since the late 1990s, Roy Mor­gan has gone one bet­ter and con­duct­ed a month­ly sur­vey using a def­i­n­i­tion of unem­ploy­ment that actu­al­ly makes sense:

” Accord­ing to the ABS def­i­n­i­tion, a per­son who has worked for one hour or more for pay­ment or some­one who has worked with­out pay in a fam­i­ly busi­ness, is con­sid­ered employed regard­less of whether they con­sid­er them­selves employed or not.

The ABS def­i­n­i­tion also details that if a respon­dent is not active­ly look­ing for work (ie: apply­ing for work, answer­ing job adver­tise­ments, being reg­is­tered with Cen­tre-link or ten­der­ing for work), they are not con­sid­ered to be unem­ployed.

The Roy Mor­gan sur­vey, in con­trast, defines any respon­dent who is not employed full or part-time and who is look­ing for paid employ­ment as being unem­ployed. ” (Roy Mor­gan, Sep­tem­ber 2011)

Roy Mor­gan’s def­i­n­i­tion there­fore nec­es­sar­i­ly records a high­er lev­el of unem­ploy­ment than the ABS—and they are also a more legit­i­mate mea­sure of real unem­ploy­ment. How­ev­er their results are also more volatile, since their sam­ple is small­er than the ABS’s, and the results are not sea­son­al­ly adjust­ed.

Fig­ure 2

Over­all how­ev­er, Roy Mor­gan’s fig­ures are a more accu­rate indi­ca­tor of the lev­el of unem­ploy­ment than the ABS’s, and also as a har­bin­ger of where the ABS data may move in the future. The cur­rent gap between the two mea­sures is the high­est it has ever been—over 5 per­cent, when the aver­age gap has been about 2.5 percent—and this implies that the next move in the ABS fig­ures could be sub­stan­tial­ly upwards. Gary Mor­gan warned that the econ­o­my is a lot weak­er than the RBA seems to think:

Today’s Roy Mor­gan unem­ploy­ment esti­mates strong­ly sup­port anec­do­tal evi­dence of con­tin­u­ing job loss­es through­out Aus­tralia. Just in the past week we have been told that West­pac has announced 550 jobs to go; ANZ is axing 130 jobs; Hold­en will cut 200 jobs at its Ade­laide plant; Toy­ota will cut 350 jobs in Mel­bourne; Reckitt Benckiser (mak­er of Mortein & Det­tol) is to retrench 200 jobs at its Syd­ney oper­a­tions; defence firm Thales shed­ding 50 jobs in Bendi­go — these are just the most promi­nent exam­ples of job loss­es occur­ring in the Aus­tralian econ­o­my!

Econ­o­mists and politi­cians are wrong to talk about a ‘tight’ labour mar­ket in Aus­tralia dri­ving wage pres­sures. Wage demands (infla­tion) at the moment are being dri­ven by unions — a small minor­i­ty of the Aus­tralian work­force — not by a tight labour mar­ket with work­ers chang­ing jobs to secure bet­ter wages and con­di­tions. Today’s Roy Mor­gan employ­ment esti­mates show why infla­tion in Aus­tralia is con­tained, and will remain con­tained — at its meet­ing next Tues­day the RBA must drop inter­est rates by at least 0.5% and prob­a­bly more.”

Fig­ure 3


If Gary Mor­gan is right, the RBA’s rosy fore­cast for the future will be shown to be in error. The pri­ma­ry source of that error will be not mere­ly mis­placed opti­mism, but reliance upon neo­clas­si­cal eco­nom­ic mod­els about the econ­o­my that ignore the role of cred­it just at the moment that decel­er­at­ing cred­it is final­ly set­ting in in earnest in Aus­tralia, after being delayed by the First Home Ven­dors Boost.

Fig­ure 4

The First Home Ven­dors Boost was the sole cause of the rever­sal of delever­ag­ing in Aus­tralia after the cri­sis began, with the growth in mort­gages more than off­set­ting the reduc­tion in debt by the busi­ness sec­tor.

Fig­ure 5

With that arti­fi­cial stim­u­lus to cred­it growth over, cred­it growth is now decel­er­at­ing in Aus­tralia, and caus­ing unem­ploy­ment to rise despite the off­set­ting impact of the resources boom.

Fig­ure 6

Mort­gage debt is now decel­er­at­ing strong­ly, and tak­ing house prices down with it.

Fig­ure 7

From its com­ment that “Hous­ing prices showed some sign of sta­bil­is­ing at the end of 2011”, the RBA appears to be buy­ing the RPDa­ta spin that a one month upwards blip in their data series after 11 months of decline sig­nals a bot­tom to the hous­ing mar­ket. How­ev­er a sim­ple com­par­i­son of house prices here to those in Japan and the USA after their bub­ble economies burst makes it hard to argue that “Aus­tralia is dif­fer­ent”.

Fig­ure 8

Of course, at this stage it is too ear­ly to tell whether we’ll fol­low the long slow decline of Japan­ese prices, or the sud­den fall that marked the USA. But by the end of 2012, Aus­trali­a’s house price decline pro­file should be appar­ent.

Fig­ure 9

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About Steve Keen

I am Professor of Economics and Head of Economics, History and Politics at Kingston University London, and a long time critic of conventional economic thought. As well as attacking mainstream thought in Debunking Economics, I am also developing an alternative dynamic approach to economic modelling. The key issue I am tackling here is the prospect for a debt-deflation on the back of the enormous private debts accumulated globally, and our very low rate of inflation.