February 2008 Treasury economic indicators

I normally don’t have much to say on the economic update provided by Treasury each month, as it is mainly just a look back at historical data. However, this time around they seem to have infused their release with negative undertones – suggesting that Treasury may be looking at providing a weaker set of forecasts than we have seen from the Reserve Bank.

This pessimism about the economic outlook was extended to some type of special report according to the link (if anyone knows the report he is talking about can they send me the link, please). Most interestingly they suggested that the recent growth in employment was the result of rising labour supply as people struggled to pay their bills. I found this statement of particular interest, as it feeds into the Treasury belief that non-tradeable inflation pressures are going to ease over the year (a belief I do not share). As a result, I wish to discuss it below the flap.

The latest set of employment figures showed that the participation rate, employment, hours worked, and wage growth were all rising – while the unemployment rate fell. Generally I would view this as a positive economic indicator. However, supposedly (according to the news story) Treasury views the rising amount of work as a result of an increase of labour supply driven by struggling households trying to balance household expenditure.

Adding credence to their view is recent credit card data showing a significant 10.3% increase in interest-bearing credit card debt over the 2007 year. High fuel and food prices combined with rising mortgage rates will be stretching the household balance sheet thereby implying that either spending growth must slow (which it is) or income growth must rise (by working more).  Furthermore, according to the Labour cost index the number of employers offering higher wages based on the premise of attracting or retaining staff (38% in December) is below the number offering higher wages to meet the cost of living for their employees (43%).

However, this doesn’t completely convince me. Firstly, retail spending has eased sharply – implying that households are changing their spending habits in the face of a slowing housing market.  Secondly, wage growth is accelerating (at 5%pa December recorded the highest rate of wage growth over the year) – if growth in the labour supply was rising we would expect to see wage growth slowing.  Furthermore, at 38% the proportion of wage claims based on retention/attractive of staff is still elevated – this was the highest value for all of 2007.

Overall, I feel that underlying labour demand is sufficient to keep wage growth chugging along over the next year, keeping non-tradable inflationary pressures elevated – given the fact that firms have been complaining about a shortage of labour for a long long time now.

Don’t get me wrong, I believe that high interest rates and rising fuel and food prices will make things difficult for the average household – however I am uncertain that this is the factor driving current employment growth (1.8%pa compared to a 1.3%pa increase in the working age population) and high participation rates (66.4%), after all demographic trends explain some of the change in participation rate, while strong wage growth in itself should attract more workers to the labour market.  Even if it is, I don’t think it will provide a death-blow to our underlying inflationary stress.