Australia’s economy at the beginning of 2016 seems to be growing less strongly than it did over the second half of 2015, at least on the evidence of the monthly labour force reports. In February total employment was 7,200 lower than at the end of December. In contrast, employment rose by 120,800 in the three months ending December 2015 and 59,700 in the three months ending September. It is possible although probably unlikely that employment could lift very strongly in the March labour force report due in mid-April, but even if it does the huge rise necessary to lift employment close to the results achieved in the three month periods ending September and December seems virtually impossible.

The softer run developing in monthly employment growth is likely to limit growth in household disposable income in Q1 2016. Wages growth was weak in both Q3 and Q4 and is unlikely to have accelerated in Q1. What lifted household disposable income reasonably well in both Q3 and Q4 was the strong growth in the number of people employed.

Reasonable growth in household income was one factor that encouraged households to spend more freely in the second half of 2015. Another important factor was that households were confident enough to spend a greater proportion of their income and save a relatively smaller proportion. An increasing sense of job security seemed to play a part in driving greater confidence in the household sector. Again strong growth in employment was very important because it helped drive down the unemployment rate from 6.3% in July to 5.8% in December.

The good news concerning the falling unemployment rate probably had added positive impact on household confidence because it was also unexpected in the sense that official forecasts from the likes of the RBA in mid-2015 were still warning that the unemployment rate would be sticky around 6% for some time.

Many factors drive the confidence of the household sector to spend more freely, but those factors related to labour market conditions are almost certainly among the more important. If the current soft patch in employment growth persists, the unemployment rate will at best flat-line between 5.8% and around 6.0%, but may start to edge higher. Either outcome is not what is contained in the latest RBA forecasts looking for the unemployment rate to decline to 5.3% later this year.

In these circumstances it really is hard to see the household sector being quite as confident about job security as was the case through much of the second half of 2015. Households are less likely to drive up the proportion of their income that they spend – the main reason household spending rose so strongly through the second half of 2015. Also, household income itself will not be growing as fast lacking the contribution from strongly rising total employment.

Watching the monthly labour force reading as well as survey questions relating to job security contained in consumer sentiment and confidence reports and surveys of job vacancies will provide the best early warning whether economic growth is losing momentum, domestic demand growth in particular. A hint of weakness is showing in all of the latest reports in these areas. These signs that demand is unlikely to be so strong in the early months of 2016 as was the case in the second half of 2015 are why we still see the RBA responding with two 25bps cash rate cuts in mid-2016, the first probably in May followed by another in June.