Economists: do not take data as gospel

By Brian Fallow

WELLINGTON - The unexpectedly good March quarter jobs data out yesterday probably overstates the strength of the labour market, economists warned.

Employment increased 0.9 per cent for the quarter to 1,741,000, which is 0.5 per cent above year-ago levels. The unemployment rate fell to 7.2 per cent from 7.7 per cent in the December 1998 quarter. Both results exceeded market and Reserve Bank expectations.

The increase in employment was not broadly based however, being concentrated in the primary sector (mainly forestry) and services, while employment in manufacturing for example continued to decline.

"With employment growth concentrated in only a few industries, this raises some risk that the data may overstate the strength of labour market activity, with the potential for some reversal in the quarter ahead," Deutsche Bank chief economist Ulf Schoefisch said.

The drop in the unemployment rate was driven by the fall in female unemployment, which tends to saw-tooth around and is difficult, according to Statistics New Zealand, to seasonally adjust. And two-thirds of the new employment was part-time, and therefore expected to pose less of a risk of wage inflation than the same number of full-time jobs might.

The part-time nature of most of the new jobs was also reflected in the fact that while the numbers employed increased 0.9 per cent, hours worked in the quarter rose only 0.4 per cent, seasonally adjusted. On an annual basis, hours worked were up 1.6 per cent, where the Reserve Bank had forecast a rise of only 0.2 per cent.

"It suggests that either the labour market is responding more quickly to a turnaround in GDP or that GDP is perhaps rising more quickly than generally realised," said Bankers Trust chief economist David Plank. "Either interpretation would eventually have consequences for inflation and monetary policy. The result should end any talk of the Reserve Bank easing in response to recent currency strength."

Yesterday's data did not invalidate the Reserve Bank's view that the economy would recover during 1999 with little inflationary pressure, Mr Plank said. "But it does chip away at that scenario."