Employment: –39.3k (from +29.3k). Unemployment Rate: 4.7% (from 4.7%). Participation Rate: 66.8% (from 67.0%).
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- Employment fell 39.3k in September, well short of market and Westpac expectations for a 20k lift, leaving annual growth well below its historic average and below that of the working-age population.
- Participation once again surprised in the same direction, falling 0.2ppts to 66.8% from its near cycle high in August. As a result, the unemployment rate rose only slightly at two decimal places, to a new cycle high of 4.72% (steady at 4.7% rounded).
- Some of this weakness may reflect an unwind of August’s strength. The ABS had flagged possible residual seasonality from recent changes to the survey design, though the size of the effect is uncertain.
- Beneath the monthly noise, the labour market continues to loosen gradually, with jobs growth running slower than labour force growth. We expect the unemployment rate to peak at 4.8% in mid-2027, though there is upside risk to this forecast.
- The data complicate the RBA’s ‘a little tight’ messaging, but with inflation the clear priority, we still expect a 25bp hike in November.
Employment surprises to downside
Employment surprised materially to the downside in September, falling 39.3k in the month, in contrast to the market’s and Westpac’s expectation for a 20k lift. August’s gain was also revised 10k lower to +29.3k. At 1.2%yr, three-month average growth remains sluggish – well below the historic average (1.9%yr) and current working-age population growth (1.7%yr).
As we discussed in our preview, the ABS noted that August’s figures may carry some residual seasonality due to recent changes implemented in the survey design – the risk being September could see some unwind of August’s strength. We do not know how significant the impact is, if any, but the ABS recommends being aware of this effect when interpreting recent data. In any case, given employment growth was already running below population growth, the story is still one of relative sluggishness for employment.
But once again, the surprise in employment coincided with a surprise in labour force participation, which fell 0.2ppts to 66.8% from its near cycle high of 67.0% in August. This translated to a 26.2k decline in the size of the labour force, which was less than the drop in employment. As a result, the unemployment rate ticked slightly higher in September, from 4.65% to 4.72% (although it was steady at 4.7% to one decimal place), a new cycle high.
This has been a recurring pattern this year – whether to the upside or downside, employment and participation have tended to surprise in the same direction, and the unemployment rate has continued to drift gradually higher. In other words, underneath the month-to-month noise, the labour market is becoming incrementally less ‘tight’ as new job creation runs slower than labour force growth. As the ABS noted, “a higher proportion of people remained unemployed compared to recent years” in September, following last month where “a higher proportion of people who were previously not in the labour force moved to being unemployed”.
Further softening to come
Looking ahead, we expect the labour market to keep softening gradually. As outlined in our October Market Outlook, the economy faces more challenges in the near term as another round of disruptions in global energy markets combines with further interest rate rises and a deepening housing downturn. Against that backdrop, employment growth is expected to run below working-age population growth over the coming year. We see the unemployment rate rising to a peak of 4.8% in mid-2027 and holding around that level for the rest of the year. There is upside risk to this forecast, especially given the ongoing trend increase in participation and the possibility that hiring cracks under tight financial conditions.
Still ‘a little tight’?
Today’s result adds another layer to what was already a tricky communication challenge for the RBA. At last month’s meeting, the Monetary Policy Board’s post-meeting statement dropped the line about the labour market being “a little tight”, instead describing it as easing “broadly as expected” – even though the unemployment rate was already tracking above the August SMP forecast of 4.5% for the December quarter. In the press conference, however, Governor Bullock reprised the inter-meeting message that “the labour market remains a little tight”.
The minutes, released earlier this week, were on the hawkish side. Discussion centred on upside risks to inflation, with the Board attributing July’s inflation surprise more to domestic capacity pressures than to pass-through from the Middle East conflict and judging that waiting for further confirmation could prove costly. The labour market received comparatively little attention, beyond noting that leading indicators pointed to near-term stability and acknowledging that returning inflation to target would require accepting slower growth in demand and employment.
With the unemployment rate now at 4.7% – a touch above the 4.6% NAIRU assumption disclosed in a recent RBA release – and slack building gradually as labour supply outpaces demand, the ‘a little tight’ characterisation is becoming harder to defend. The minutes flagged the possibility that the unemployment rate consistent with inflation at target is higher than previously thought, which would offer the Board one way to square this circle. Either way, today’s data are unlikely to shift the dial for November on their own. With inflation the clear priority, we continue to expect a 25bp hike, taking the cash rate to 4.85%, with the September quarter CPI the key remaining hurdle.
