If unemployment is the fulcrum on which the Australian economy is delicately balanced, then the increasing loss of construction jobs may well be the weight that drives things down sharply.
The unemployment rate has crept up from its recent low of 4.9 per cent in February to its current level of 5.2 per cent, with the construction industry in large part responsible for the rise.
Around 50,000 construction jobs have disappeared over the past twelve months as the sector's share of the total labour market shrivelled to 9.1 per cent from its peak of 9.5 per cent early last year.
That doesn't sit well with the creation of more than 330,000 jobs across the economy over the same period.
Even the struggling retail sector managed to deliver a marginal rise in its number of jobs.
While manufacturing and the information and media sectors have endured a tougher year for lost jobs in percentage terms, it is construction's size — the third largest industry behind healthcare and retail — as well as the speed and breadth of its slowdown that makes it pivotal.
Callam Pickering, Asia Pacific economist at the global jobs site Indeed, has delved into the data and found things are likely to get much worse.
"With Australia's residential construction boom in the rear-view mirror, construction job opportunities are suddenly limited," Mr Pickering said.
"Our latest boom has now run its course and activity is expected to decline further over the next two years. Naturally there is worry about construction workers.
"[Indeed] data suggests [there is] good reason for concern — the number of construction job postings per million postings was down 35 per cent in August from its peak in December 2017.
"Construction employment topped out in February 2018, as a share of total employment, while construction activity began falling off a few months later."
Unemployment keeps edging up
This week's jobs data will be central to the immediate future of interest rates and borrowing costs.
A benign result takes a bit of pressure off the Reserve Bank, in the short term at least; a shocker and a October rate cut is very much in the frame.
Given key forward looking indicators such as job ads and vacancies are getting weaker by the month, unemployment kicking up another notch is a distinct possibility.
Equally, the glaring weakness in private-sector demand displayed in the recent GDP numbers and sub-trend business conditions do little to inspire confidence that employers are about to employ more.
For the record, Westpac has forecast the 42,000 jobs blockbuster in July is unlikely to be repeated in August. Pencilling in a more modest 7,000 new jobs and keeping the participation rate steady would see unemployment hit 5.3 per cent
That makes the RBA's ambition of reaching full employment at 4.5 per cent more forlorn, and kicks the possibility of a decent pick up in wage growth further down the track.
ANZ's David Plank also sees unemployment ticking up this week.
"We think the RBA will have little choice but to ease further over the coming year as the impact of the sharp domestic slowdown feeds into the labour market," Mr Plank said.
However, Mr Plank said the timing of rate cuts will depend on when the weakness becomes apparent, with the recent rebound in house prices acting as a counter-balance.
"On the face of it, this [a strong housing market] weakens the case for further rate cuts in the near-term. But we expect a weak employment report next week, forecasting unemployment to rise to 5.3 per cent.
"This, in our opinion, will offset the strong housing data and force the RBA's hand in October. A stronger employment report, in contrast, would delay the RBA's next cut."
Labour intensive
While construction has ridden a wave of booms and busts over the journey, the slowdown this time around could be acute given it is centred on residential construction, Mr Pickering argues.
"Residential construction is more labour-intensive than engineering construction, which means that a billion dollars of residential construction creates more jobs than a billion dollars of engineering construction.
"That's likely why employment in the sector held up surprisingly well despite the extraordinary decline in engineering construction from 2012 to 2016."
Residential builders still have plenty of work on their books, just not enough to sustain all the jobs created in recent years.
"While there are still plenty of projects in the pipeline, the number of new ones isn't enough to offset those being completed," Mr Pickering said.
"The declining demand for construction workers may explain why wage growth is lower in this sector than in most other Australian industries."
However, Mr Pickering notes there is a saving grace for construction workers; they tend to be far more flexible, and their skills more transferable, than workers in other sectors.
"This places them in a favourable position even if construction opportunities keep on falling, provided that job opportunities in areas like production, maintenance or engineering don't follow suit."
And right at the moment, that is a very big "if".
The pace of job creation is slowing markedly. From an annual growth of almost 3 per cent in May, to 2.4 per cent now, with Westpac arguing it will be close to 2 per cent by the end of the year.
Markets extend their rally
Global equity markets continued on with their fairly solid September rally, which has seen them put on around 3 per cent since the start of the month.
Wall Street took a bit of breather on Friday despite stronger-than-expected retail figures and the thermostat being dialled down on the US-China trade tensions.
The real action was on bond markets where US Treasury yields jumped after a couple of conciliatory trade gestures trickled out ahead of the planned US-China trade talks next month.
China exempted some US goods from its new tariffs — most notably pork and soybeans (not surprising given soaring food prices in China at the moment) — while US President Donald Trump said he was open to an interim trade deal (not surprising given ratcheting tensions up doesn't seem to help either his approval rating or the stock market).
Yields on 10-year bonds posted their biggest weekly increase since 2013, while on the short-end, 2-year bond yields experienced their sharpest rise in a decade.
All in all, the yield curve, as they say, "steepened", or moved further away from the recent flirtation with inverting — a sign the market is betting the risk of recession risk is easing.
Cuts, a couple of holds and a hike
It is a very busy week on the global central bank calendar an expected cut from the US Federal Reserve the main event.
Despite a generally strengthening domestic economy — underscored by last week's strong retail figures — a cut from the Fed is all but certain.
What is less certain is the prospect of more cuts which the market has priced in.
While trade tensions and global growth have deteriorated since the Fed's last cut in July, US growth and inflation appear to be on a more solid footing.
It is a delicate balance. If the Fed indicates there are more cuts on their way, markets are likely to roll on happily enough. A sniff of hawkishness may signal another retreat.
Elsewhere, the Swiss National Bank is expected to match the ECB's cut, if for no other reason than to try and keep a lid on what it calls its "significantly overvalued" currency.
The Bank of England also meets this week, but has little alternative but to hold given the on-going uncertainty over Brexit, according to Citi's global economics team.
"In case of a deal or Brexit being reversed, rate hikes would follow, given how tight the labour market is. No-deal Brexit would probably trigger rate cuts and a new round of QE [quantitative easing]," Citi wrote in a weekend note.
The Bank of Japan probably won't cut either, given it is already below zero.
Norway looks like following a contrarian path.
The Norges Bank is expected to lift its key policy rate a notch to 1.5 per cent, with the possibility of additional hikes down the track.
Australia
| Date | Event | Comment/forecast |
|
Tuesday 17/9/2019 |
RBA minutes | Insights into RBA's September decision to hold rates at 1pc |
| House prices | Q2: ABS quarterly house price index, a bit dated compared to monthly data | |
| TPG FY result | Market consensus is a FY underlying profit of $376m, down 13pc on last year | |
|
Thursday 19/9/2019 |
Employment/unemployment | Aug: 20K new jobs and unemployment steady at 5.2pc is forecast |
| Population data | Has been growing solidly at 1.6pc a year, similar momentum expected | |
| AGL AGM | Interest in future plans to maintain and develop its generation fleet & national energy policy |
Overseas
| Date | Event | Comment/forecast |
|
Monday 16/9/2019 |
CH: Monthly data release | Aug: Industrial production, retail sales and infrastructure investment all expected to tick up |
|
Tuesday 17/9/2019 |
US: Industrial production | Aug: Likely to rebound marginally from previous month's decline |
| US: Housing index | Sep: A key indicator for the US domestic economy | |
| CH: House prices | Aug; Key market indicator with implications for steel demand | |
|
Wednesday 18/9/2019 |
US: Fed Reserve interest rate meeting | FOMC statement and projections, 25bp rate cut is expected |
| US: Housing starts | Aug: Has shown softness recently | |
|
Thursday 19/9/2019 |
US: Home sales | Aug: Not the softest part of US market, rose in July |
| JN: BoJ rate decision | Should hold below zero | |
| UK: BoE rates decision | Likely to hold at 0.75pc |
