June 29, 2022

Business sales and employment behaving oddly

Job numbers remaining strong despite a weaker economy

Statistics New Zealand have recently released a summary of their business financial data collection. This data allows us to track broad movements in a number of financial metrics for businesses in New Zealand.

By necessity it is highly aggregated, but the broad movements in the data are instructive. In this article we focus the relationship between sales and two metrics: employment and earnings (wages and salaries) over the period from 2019Q4 to 2022Q1.

Sales in this data are measured by Statistics New Zealand using the following guideline (from Datainfo+): Modelled from Goods and Services Tax (GST) sales data; supplemented with data collected via questionnaire for large and complex businesses.

This period covers the very end of the pre-COVID-19 “normal times” in March 2020 up until the present.

We have looked at the relationship between GDP and employment through the crisis in 2020 in previous editions of our Bird’s Eye View. We established that during the events of 2020, the expected relationship that employment would fall with GDP was broken. This is likely explained by a combination of factors and government interventions, including the wage guarantee scheme put in place at the time.

The GDP metric is loosely related to financial metrics for businesses. It is calculated using the final value of goods sold, which means it is related to sales in some way. Accordingly, there is value in testing the above observation using business financial data.

We know that businesses will hire staff (or increase pay) in the process of bringing goods and services to market anticipating that they will sell. If they are correct in that anticipation, we should observe a positive relationship between sales, employment, and earnings for an individual business. 

We can use the business financial data collection to test if the expected relationship between sales, employment, and earnings has held through the past nine quarters. What we expect to see is that the growth rates in these variables should move in the same direction (either all positive or all negative).

In a table below we look at the growth rates in sales, employment, and earnings for each industry included in the data release from Statistics New Zealand. The growth rates are calculated for the period 2019Q4 to 2022Q1.

Our data and calculations reveal that just six of the 14 industries included exhibit the expected relationship (moving in the same direction) between all three variables over the period considered.

If we relax the requirement that all three variables move in the same direction, and instead assume only employment needs to move in the same direction as sales, we observe that eight of 14 industries exhibit this new requirement. 

  Sales (%) Employment (%) Earnings (%) Is the expected relationship sales and employment indicated (Y/N) Is the expected relationship sales and earnings indicated (Y/N)
Agriculture, Forestry and Fishing 3.10 -0.25 5.99 N Y
Mining -2.47 4.55 4.80 N N
Manufacturing 5.23 -0.44 5.55 N Y
Electricity, Gas, Water and Waste Services 5.67 7.64 17.41 Y Y
Construction 11.32 12.86 14.36 Y Y
Wholesale Trade 9.77 -0.05 13.00 N Y
Retail Trade and Accomodation 4.54 -3.48 5.21 N Y
Transport, Postal and Warehousing -3.36 -8.50 2.04 Y N
Information Media and Telecommunications -1.81 -5.63 -4.85 Y Y
Rental, Hiring and Real Estate Services 0.31 2.06 22.18 Y Y
Professional, Scientific, Technical, Administrative and Support Services 0.01 5.59 12.23 Y Y
Education and Training 2.48 -3.00 0.93 N Y
Health Care and Social Assistance 13.58 7.00 14.00 Y Y
Arts, Recreation and Other Services -1.80 -1.35 1.75 N

Especially in the case of sales and employment, the expected relationship does not hold up in six out of the 14 industry groups. This is counterintuitive and we suspect that a number of global pressures, such as logistics and supply chain issues, as well as international and local government interventions, including employment measures, have distorted the labour market. In time, the distortions might disappear. However, there are few signs of “normality” returning just yet. Economic activity currently looks relatively weak, but recruitment activity remains strong.

This exercise provides a glimpse of patterns to be considered in more serious analyses.