This has been quite a busy week in terms of data releases! Not only have we received the August unemployment figures, but also new data from the Westpac–Melbourne Institute regarding consumer sentiment, ultimately helping us both understand the further implications associated with the lockdowns and consider how optimistic we are about the end of lockdown!
1. Unemployment figures at 4.5% during the month of August
This week, the federal treasurer, Josh Frydenberg, announced that unemployment for the month of August has dropped to its lowest rate in nearly 13 years, however, this is nothing to celebrate. At face value, the notion that we are nearing the NAIRU is quite remarkable, when considering the fact that New South Wales, Victoria and the ACT are under a lockdown-induced economic contraction. However, one has to consider how unemployment is calculated as well as the relationship unemployment has with indicators such as the participation rate and ever increasing under-employment.
Breaking down the figures:
The 0.1% decrease from the previous month of July was largely driven by the fact that many people had given up looking for jobs, with the labour force participation rate dropping from 66% to 65.2 % during the same month. This is reinforced by Bjorn Jarvis from the ABS who notes that “Beyond people losing their jobs, we have seen unemployed people drop out of the labour force, given how difficult it is to actively look for work and be available for work during lockdowns”. He highlights how lockdowns have significantly decreased workers’ confidence and expectations of the economy, prompting the participation rate to fall significantly. It should also be noted that the drop in participation has cushioned the impact of 146,300 job losses on last month’s unemployment figures. However, the figure was also suppressed by continually growing levels of underemployment.
But what is underemployment?
The RBA has noted that while the unemployment rate was historically used to determine the spare capacity within the labour market, the underemployment rate is becoming more and more significant to also help shed light on the spare capacity.
Underemployment refers to those who are employed, but want to and are able to work more hours. It was recorded that underemployment had risen by 1% to 9.3% during the month of August, with total hours worked dropping 3.7% at the same time. This is due to the lockdown forcing many individuals to work shorter hours, be given no shifts in the month, or made redundant. For this reason, the shadow treasurer, Jim Chalmers signified that last month’s employment figures “masked the tough reality”, adding that “unemployment is only low because more than 200,000 people have stopped looking for work in the past two months, and 1.2 million Australians are “working” zero hours. If we include these people, the effective unemployment rate in Australia right now is over 14 per cent”.
The shadow treasurer is not the only one to place the effective unemployment rate far above the current figures. AMP Capital chief economist, Shane Oliver believes the effective unemployment rate to be 6.8%, with Goldman Sachs chief economist, Andrew Boak stating an effective rate of 9.1%.
2. The consumer confidence index has increased by 2% this month to 106.2
Earlier in the week, the Westpac–Melbourne Institute announced fairly positive outlooks in terms of consumer confidence, compared to the previous month, where the consumer confidence index had fallen by 4.4%. Again, with the ever present impacts of lockdown, this figure is quite interesting to consider, both in terms of why the movement has occurred, as well as the corresponding impacts on the economy. Westpac Chief Economist has highlighted that “The improving vaccine situation appears to be a key factor behind these results”. His views encapsulate the notion that factors such as the NSW Government’s release of a roadmap out of lockdown have helped rekindle some degree of consumer confidence.
So what do these figures mean?
It is important to note that the consumer confidence index is simply an indicator, helping us understand and/or forecast future economic movements. It is calculated by surveying over 1200 Australian households in relation to their perceptions of current and future economic conditions, where consumer confidence above 100 reflects that there are more optimists than pessimists, and vice versa for a value below 100 (a value of exactly 100 represents an equal balance between optimists and pessimists).
While it is very much a statistical estimate as opposed to 100% accurate data, as economists, we are interested in how it can help us forecast areas such as domestic consumption, which make up over 50% of aggregate demand (C + I + G + (X - M)), which we all know helps to lead to short term growth. To help us better understand the relationship between the consumer confidence and consumption levels, we can look at figures of consumer confidence during previous time periods and compare them with their respective consumption levels. For example, consumer confidence fell from 100.7 in April 2019 to 75.6 in April 2020, following the initial lockdowns in response to the pandemic. During the June 2020 quarter (which April was a part of), household consumption fell by 12.1%, the largest quarterly decrease in Australia’s history. And thus, while it must be reinforced that there is no strict link between consumption and the consumer confidence index, it will definitely be interesting to observe whether consumption levels for this quarter will reflect the general trend presented to us in the consumer confidence index.