Our official unemployment rate is 3.4 per cent, well above the multi-decade low of 3.2 per cent from a year ago. The US unemployment rate is also sitting at 3.4 per cent, the lowest since 1969.
Confidence about job security tends to support consumer spending, while wage gains are helping offset increases in mortgage rates and the cost of living.
However, if you’re looking for clues to signal the timing of the next recession, the unemployment rate isn’t one of them.
The labour market tends to be a lagging indicator. It is often very strong heading into a recession, with unemployment only rising once the downturn has become entrenched, and continuing to increase even after the recession ends.
In December 2007, just as New Zealand fell into recession, the unemployment rate was extremely low at 3.4 per cent.
It started rising once the recession had started and didn’t peak until the end of 2009, six months after the recession ended.
In the US, there have been 11 recessions since 1950 and the unemployment rate has averaged a modest 4.7 per cent just before each of those started.
That’s only just above the average low of 4.4 per cent in each of those cycles.
Mark Lister is an investment director at Craigs Investment Partners. Photo / Supplied
During those periods the US unemployment rate ultimately reached an average of 8.5 per cent, but that peak typically didn’t come until months after the recession ended.
There are a few reasons why unemployment can be out of sync with economic growth.
In the early days of a slowdown, businesses are reluctant to lay off staff as they want to retain that productive capacity in case the weakness proves short-lived.
That’s especially true after a period of labour shortages when it’s been difficult to find staff, as is the case today.
There’s a similar lag coming out of a downturn. When the recovery first takes hold, businesses first try to get more out of their existing workforce. They’re cautious about taking on more permanent staff until they see more evidence things are getting better.
In short, we shouldn’t interpret the strong labour market as a reason to be complacent about the outlook.
Other reliable indicators point to cloudy skies ahead and most economists (as well as central banks) are forecasting a recession, both here and in the US.
Having said that, there’s still a chance we could dodge a bullet or at least avoid a severe downturn.
The last three years have been so unique that forecasting has become much more difficult, and the usual rules of thumb might not work quite as well as they have in the past.
The recent strength in migration is one example of a positive surprise few people saw coming. If this continues, parts of the economy could prove more resilient than expected.
On the other hand, increases in mortgage rates are yet to take full effect, while the business sector is likely to become increasingly cautious as the election draws closer.
Low unemployment and a healthy labour market should be celebrated but, as encouraging as this might be, it doesn’t necessarily mean we’re out of the woods.
Mark Lister is an investment director at Craigs Investment Partners. The information in this article is provided for information only, is intended to be general in nature, and does not take into account your financial situation, objectives, goals, or risk tolerance. Before making any investment decision Craigs Investment Partners recommends you contact an investment adviser.
