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

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.
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74 Responses to RBA Rates Decision & Roy Morgan Unemployment

  1. clive says:

    This seems to be a clear indicator of where house prices are heading.

    ‘Unions fear more than 500 jobs will be lost after one of Australia’s oldest construction companies stopped trading on Thursday.

    Kell and Rigby has been operating since 1910 and has been involved in major projects in Sydney, including the recent refurbishment of Sydney Town Hall.

    The News South Wales branch secretary of the CFMEU, Brian Parker, says the company stopped trading on Thursday and is likely to go into voluntary receivership on Friday.’

    http://www.abc.net.au/news/2012-02-09/500-jobs-in-the-balance-as-construction-company-considers-finan/3821662/?site=sydney

    The feedback I’m getting from builders in Queensland is that the only thing keeping the industry going is mining towns, flood repair, and cyclone repair.

  2. alex78 says:

    Great charts, Steve.

    Why do you think we’re unlikely to see the FHOB (FHVB) reintroduced?

  3. clive says:

    It’s been suggested that the RBA is aware of what’s coming and they are just saving their bullets. Anyone?
    Does anyone believe the government will have another crack at the FHVB? Qld has recently extended their $10000 to April, however I don’t think it’s having much effect as even many of the MSM have accepted that house prices are falling the only disagreement appears to be how far and how fast.

  4. RickW says:

    There is a good paper on this link regarding differences in mortgages between countries:
    http://www.housingamerica.org/RIHA/RIHA/Publications/74023_10122_Research_RIHA_Lea_Report.pdf

    The main factor is the full recourse lending. Some areas around the Gold Coast look like the power is off at night. This is not solely related to power costs. A significant portion of the houses are vacated as owners are working FIFO jobs for mining companies, maintaining an income to service their mortgage. Flights west and north from the population centres in the SE to support these long-range commutes to suit work rosters is growing.

    Based on the more onerous consequence of default in Australia I suspect the housing price decline in Australia will more closely trend Japan. Probably a bit faster down than Japan but much slower than the US rate.

    Japan has suffered through the rise in China, which has been a long process. US just blew up with people free to walk away once there was no equity. Australia is certainly in a much better position to manage it down rather than a blow up like the US.

    I would argue the RBA got it right but for the wrong reasons. Australia needs to discourage investment/speculation in wasteful enterprises. The country needs to be encouraging savings and investment in its strengths not supporting property ponzis and artificially supporting lost causes.

  5. RickW says:

    There is a good paper on this link regarding differences in mortgages between countries:
    http://www.housingamerica.org/RIHA/RIHA/Publications/74023_10122_Research_RIHA_Lea_Report.pdf

    A big factor is full recourse lending or not.

    The lack of lights at night around some newer sub-divisions on the Gold Coast is not solely related to power costs. A significant proportion of the houses are vacated as owners are working FIFO jobs for mining companies; maintaining an income to service their mortgage. Flights west and north from the population centres in the SE to support these long-range commutes to suit work rosters is growing.

    Based on the more onerous consequence of default in Australia I suspect the housing price decline in Australia will more closely trend Japan. Probably a bit faster down than Japan but much slower than the US rate.

    Japan has suffered through the rise in China, which has been a long process. US just blew up with people free to walk away once there was no equity. Australia is certainly in a much better position to manage it down rather than a blow up like the US.

    I would argue the RBA got it right but for the wrong reasons. Australia needs to discourage investment/speculation in wasteful enterprises. The country needs to be encouraging savings and investment in its strengths not supporting property ponzis and artificially supporting lost causes.

  6. cyrusp says:

    The RBA knew that even if they cut the banks wouldn’t follow. Or the banks would raise instead. So they’re in a bind.

    Professor Keen, I’m having a hard time reconciling endogenous money theory with all this talk these days about banks offshore funding costs going up. Why can’t the banks just borrow at the RBA rate? Why are they going offshore?

  7. mahaish says:

    think the point is,

    the rba board shouldnt b allowed anywhere near a interest rate decision.

    they constantly over shoot or under shoot.

    we should let market forces dictate this process.

    anyway under endogenous money , and the implicit or explicit gaurantee the central bank provides for the payment system, they are constanly reacting to the changes in the stock/flow of monetary aggregates, rather than pre emptively controlling it.

  8. glubilee says:

    Be careful in you conclusions about US mortgage market, it is not monolithic. The rules vary greatly state by state and even mortgage by mortgage. In US many mortgages are fixed rate, and only way to take advantage of lowering mortgage rates is to re-fi the loan. So given US rates have been on decades long downptrend, anyone in a mortgage for more than a few years, while equity was still increasing before bubble burst, like refi’d. Well in California, if you refi’d, your loan becomes non-recourse. Some states it’s been taking 2 years or more for the house to be repossessed, but here in MN it can happen in 6 months, even when contested. Also, while there is an increase in strategic defaulting, there are still majority of people in horriby underwater mortgages that pay them if they can, for all kinds of reasons. Most of the defaults nationally are simply by those who are unemployed or whose businesses died, who couldnt pay mortgage. I do contend a more sudden dive in prices, like in some of the hardest hit states like Florida, California, lead to more willingness to stop paying an underwater mortgage, which really is best for general consumer finances and for macro economy. However, a long slow bitter decline like Japan and that is likely in Australia, leads to a multi decade third world debtor nation-like austerity plan. People spending their whole lives paying debts on worthless assets, banks forever bleeding any life out of the economy. Japan had other policies I place, that despite real estate depreciation, stock depreciation, their regular working folks lifestyles have done fairly decent in their lost decade. Meanwhile, US that had no such loss decade prior to 2008. But compare the wealth and poverty of the pics of the people, the houses, the cars in the Katrina disaster in the US and Japan’s earthquake, tsunami. There is no comparioson,while most of the pics i f Katrina were of people in poverty, most of the aftermath of the tsunami was brand new cars and wonderfully nice houses being crushed, with safes full of cash floating away. Depreciating real estate is not the whole story of the health of a country’s working people, but doubt Australia will have the benefit the Japanese have had.

  9. centerline says:

    Well said Glubilee. Japan was unique in many ways – including culture as well as timing. Would be a hard act to follow.

  10. alainton says:

    Lets not forget a catastrophic fall in household formation in Japan caused by its ageing population and lack of immigration made the downside of Japan’s house prices far worse, and a return in the trend of household formation is helping the US market to recover.

  11. clive says:

    @alainton Not so sure about household formation have a look at this article.

    “The US Census however splits households into two categories: “family” and “non-family”. About 66% of US households are families, with the rest classified as “unrelated people” sharing a living space – college students, unmarried couples, singles living on their own, etc. The chart below (last 20 years) shows that non-family households have generally been growing in line with the US population and although dipped in 2008, have since recovered.

    The real problem however is found in the family household formation. Family households have completely decoupled from the US population growth since 2008.

    This deviation is quite new. Family households have been forming at an average rate of 651,000 per year since at least 1947 (when the first annual household data became available). During that whole period the only years showing “negative formation” are 2008, 2010, and 2011 – likely the result of families moving together (parents and grandparents, etc.).

    Clearly the simplest explanation for this divergence is the spike in unemployment and economic uncertainty. People are forgoing or delaying forming separate family households (such as delaying marriage). As JPMorgan pointed out last week, this should correct itself if employment improves. ”

    Since many believe the unemployment figures are BS….

    http://soberlook.com/2012/01/story-of-household-formation-is-about.html

  12. Steve Hummel says:

    In regard to economic forecasts and economic systems:

    Virtually everyone and every entity has an agenda. It would be best if we adhered to a system that made a profit making system operate like most euphemistically believe capitalism does or will; and that has as its agenda the economic liberation of the individual not just the freer operation of the business entities within that system.

  13. Lyonwiss says:

    Cyrusp February 10, 2012 at 1:45 pm

    Most economists have little clue of what they are talking about, because they have no idea of the big picture. Their training and their careers are about publishing as many research papers as possible, which requires a narrow focus in order to establish an “expertise” or an authority in some area of economics, so that they can neither be challenged nor are they likely to be challenged academically, because they do not impinge on other experts’ turf.

    When these economists make pronouncements about how to solve current economic problems, they are usually unqualified based on their recognised expertise, which I contend is invariably narrowly focussed. But they are given a hearing by the media on the basis that they are famous for something: written a book, won the Nobel prize or any other recognition, deserved or otherwise.

    Without any intention to belittle Steve’s achievements, I point out that public ignorance, particularly the media, create totally unrealistic expectations of experts, inducing them (through situations and circumstances) to predict, forecast or opine on matters which are outside their competence. Perfectly good
    economists have been turned into charlatans through the media circus.

    After this long winded comment, my unsolicited short answer to your questions is: as far as I know both from all papers and comments I read on the subject and by my own a priori reasoning, endogenous money and MMT only apply to a closed economy, and not the real world of open economies. Fiat money is based on authority or law enforcement, for which treaties, agreements and the military are less cogent international instruments.

    Australia has less net savings domestically than is needed for its investment capital and Australia is therefore dependent on borrowing from overseas. Lending creates deposits, but does not immediately create equity nor meet capital requirements. The government does not print money or increase its debt to fulfil private sector needs (except in a crisis).

  14. RJ says:

    “Australia has less net savings domestically than is needed for its investment capital and Australia is therefore dependent on borrowing from overseas”

    Aust needs Aust dollars. These dollars may be held by foreigners (and will be if Aust runs a trade deficit) but Aust dollars can ONLY increase from

    -Aust banks lending Aussie dollars or
    -The Aust Govt running a deficit that is not drained by bond issues.

    Aust dollars CAN NOT be increased by overseas borrowing. All this can do is transfer Aussie dollars from a foreign holder of Aussie dollars to a Aussie resident

    So all Aussie money originates from Aussie banks. Backed by either non Govt or Govt debt

    Austs can increase their holding of say US dollars by borrowing from foreigners but if they then want Aussie dollars they need to find someone with Aussie dollars to swap US for Aust $s.

  15. RJ says:

    “endogenous money and MMT only apply to a closed economy, and not the real world of open economies.”

    Do you even know what this means?

  16. RJ says:

    “The government does not print money or increase its debt to fulfil private sector needs (except in a crisis).”

    The Govt does not really print money any more. Cash and coins are only used to allow an easier transfer of bank credit. So credit ALWAYS comes first

    And you are completely wrong on Govt debt. Govt debt does fulfil the private sectors needs (to save). Pension funds often hold Govt bonds. And these bonds are only available if Govts run deficits (accumulated as debt).

  17. RJ says:

    “I point out that public ignorance,”

    Agree it is not great. MMT though does understand money and banking but most do not. So there is hope when at least one group can explain how money and banking works so clearly.

  18. Steve Hummel says:

    Ultimately, what will change and make economic, financial and monetary systems more equitable, humane (with or without stability) and even understandable to most individuals…..regulations?, differential equations? or reassessment of and policy re-alignment with the the best human values, most resonant ideas and last but not necessarily the least, the true economic self interest of individuals? Paradigms, systems of ideas and values, these have the power to change the world internally AND externally. Start from the source of power, human awareness, learn its anatomy (and even perhaps its basic nature) and build all of society’s systems from there……or lesser values will reign instead. Man by his very nature must chose to believe something, better to believe in and make real the higher realism than some lower idealism.

  19. Lyonwiss says:

    @ Steve Hummel February 11, 2012 at 8:19 pm

    You said: “Man by his very nature must chose to believe something, better to believe in…”

    I strongly disagree with this, because it is simply wrong. I would believe in something only because I have NO choice but to believe in it. Believing in something just because you feel that you are compelled to choose between available alternatives is surely a path to human misery. This applies to economics as much as it applies to life in general: one wrong idea against another wrong idea.

  20. Lyonwiss says:

    @ RJ February 11, 2012 at 7:59 pm

    You state ad nauseum the nonsense: “Government debt = Private sector saving”

    Where is the private sector saving which corresponds to the Greek government debt?

  21. RJ says:

    Lyonwise

    Do you know what a financial liability is. And a financial asset

    In fact you do not otherwise you would not ask this above question

    Govt debt ALWAYS equals a non Govt financial asset. But you like many are ignorant of this point and what it means. As you are of the huge difference between Greek Govt debt (they are no longer monetary sovereign) and Aust Govt debt.

  22. Lyonwiss says:

    @RJ February 11, 2012 at 9:32 pm

    I hear your insult that I’m stupid and ignorant. What is the the “non Govt financial asset” (rather than private sector saving) which corresponds to Greek Govt debt?

  23. NeilW says:

    “What is the the “non Govt financial asset” (rather than private sector saving) which corresponds to Greek Govt debt?”

    What do you think Greek government bonds are then? What do you think their owners own if not a financial asset?

  24. Lyonwiss says:

    @NeilW February 11, 2012 at 9:49 pm

    Of course, I’m an idiot. I get it: government debt comes from the issuance of government bonds. As RJ said: “Pension funds often hold Govt bonds. And these bonds are only available if Govts run deficits (accumulated as debt).” So the private sector owns Greek government bonds, so there is no problem then. All the talk of sovereign debt default is just nonsense. I have been taken in again.

  25. RJ says:

    Lyonwise

    “All the talk of sovereign debt default is just nonsense”

    It is nonsense for monetary sovereign countries like Aust. But as Greece has given away their most valuable asset there is a chance of default if the ECB does not step in.

    But if you now understand that Govt debt equals a non Govt ASSET. This is a step in the right direction

    And for countries like Aust more Govt debt would be a huge benefit to the majority of people. And talk of countries like the US defaulting for economic reasons is nonsense based on unbelievable ignorance about money and banking. But unfortunately one that impacts on many politicians, rating agencies, economists etc.

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