Spectacular employment growth in August; and not temporary election-related hiring

Employment increased by 30.9K in August, following an upwardly revised 25k gain in July. The market was expecting +25k.

Full-time employment increased a massive 53.1k, following a downwardly revised -9.6k fall in July.

Part-time employment fell a chunky 22.1k, following an upwardly revised 34.6k gain a month earlier.

The unemployment rate fell to 5.1%, its lowest post-financial crisis reading.

The participation rate eased to 65.4% from 65.5%.

The big fall in part-time employment suggests that the survey, conducted during the middle two weeks of each month (8-21 August), did not capture a spike in employment due to the 70,000 workers - mostly temporary - employed on the 21 August election day.

Strong 'underlying' demand for labour in the big population States

Therefore, this result can be assumed to stand on its own as an indication of the 'underlying' strength of demand for workers in Australia.

In contrast to some of the bigger employment gains in recent months, August employment growth was not driven by demand from the resource-rich State of WA. Rather, the major population States NSW and Victoria accounted for 49k of the 53k in full-time hiring. These States are dominated by the services industries and also include some manufacturing industries.

A vote of confidence from the WA mining sector

In WA, 9k part-time jobs were completely converted to full-time positions, leaving total employment unchanged on the month. But this is a big vote of confidence in the outlook by mining companies and related services. In particular, mining expansion is buoying the construction industry in that State. Miners have, of course, very long time frames when making investment and associated employment decisions. The current level of uncertainty over whether there will be a mining tax and what size it will be does not appear to be affecting employment decisions

Households to move back into the economy's driving seat

Today's report is very encouraging for the growth outlook over 2H 2010, as it is further evidence that the household sector is moving back into the economy's driving seat.

The RBA is expecting this: NOT a trigger for a rate hike

Today's report also raises the risks towards higher inflation. Employment growth of 3.2%/yr is strong, but as set out in the August Statement on Monetary Policy, the RBA has already assumed, "above average growth in the working-age population and modest increase in the participation rate", to result in the labour market tightening "gradually over the forecast period".

So while we can debate whether labour market capacity is tightening in line or more rapidly than the RBA has been expecting, it is clear that the labour market is behaving roughly in line with the RBA's thinking.

On this rationale, we don't see today's report as a trigger to bring forward our expectations of an interest rate hike, which we have pencilled in for February 2011.

The RBA told us that having moved market interest rates back to 'average', they were now most focused on inflation domestically and on the European debt crisis internationally. The latter has evolved in a relatively orderly fashion thus far (it would take a seizure in credit markets to prompt the RBA to cut rates).

On inflation, our higher-frequency inflation gauge tells us that September quarter inflation pressures have been modest thus far, so we don't expect the quarterly inflation report (released late October) will be the 'smoking gun' to trigger a rate hike.

Quarterly inflation readings remain the most likely trigger for rate hikes

Undeniably, inflation pressures do exist in the economy and are probably intensifying. Inflation will become a bigger risk at some point. We will of course observe the September quarter inflation report and if inflation is much stronger than expected at that point, would be likely to call for a hike at the next RBA Board meeting (November).

But if not the September quarter, then the December quarter report released late January has reasonable potential to sow that inflation is gathering pace. Hence, we pencil in the next 25bp increase in the Cash Rate for the February meeting.

The RBA will be unconcerned if/when a CPI report shows that inflation has already picked up. It will not be concerned that it may have 'fallen behind the curve'. It has already positioned rates for this (prudent pre-emptive tightening put it 'ahead of the curve' this year, unlike the RBNZ), so only a little more work need be done with rates at the point when inflation does begin to show through, to take the steam out of consumer price pressures.

Roland Randall

Strategist, Fixed Income and Foreign Exchange