What does falling 'real' unemployment mean for ASX shares?

Could things be turning positive for the Aussie economy?

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ASX shares have been volatile in September, despite the labour market showing signs of improvement, with 'real' unemployment dropping significantly in August.

While this is positive news for the broader economy, what does it mean for the S&P/ASX 200 index (ASX: XJO) and the broader market?

Could this be a signal for a more robust recovery in the Australian share market, or are there underlying factors investors should be aware of?

Let's take a look.

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Aussie unemployment drops

According to market research firm Roy Morgan, Australia's 'real' unemployment rate dropped to 9.1% in August.

This is a 1% reduction, primarily driven by an increase in part-time jobs.

Roy Morgan defines 'real' unemployment as anyone over 14 years old who is "looking for work, no matter when".

August saw the unemployment figure fall by 174,000 people to 1.42 million Australians out of work.

Part-time employment jumped by 136,000 positions, while full-time employment remained relatively unchanged.

Total employment numbers surged by 133,000, tallying more than 14.28 million.

Said otherwise, there were 1.42 million Australians unemployed in Roy Morgan's data. The company puts this down to a larger workforce.

The workforce in August was 15,711,000 (… up 377,000 from a year ago) – comprised of 14,288,000 employed Australians (… up 640,000 from a year ago) and 1,423,000 unemployed Australians looking for work (… down 263,000 from a year ago).

What does this mean for ASX shares?

This boost in employment is encouraging, especially for ASX investors who monitor labour market trends closely.

Whilst the stock market is not the economy – nor is it a predictor of – it does represent corporate earnings, and the expectations of these.

Furthermore, the S&P/ASX 200 index often reacts to shifts in economic fundamentals like employment, as it influences consumer spending, business confidence, and overall economic growth.

Lower unemployment typically signals a strengthening economy, which can positively impact ASX shares.

Companies in sectors like retail, consumer goods, and services often benefit from higher employment levels, as more people with jobs often leads to increased spending.

For instance, ASX shares like Wesfarmers Ltd (ASX: WES) and Woolworths Group Ltd (ASX: WOW) might see an uptick in consumer demand as more Australians are employed, particularly in part-time positions.

Furthermore, businesses tend to perform better when consumer confidence is high, potentially driving up the overall ASX 200 index.

More jobs mean higher disposable income, leading to more robust sales and, in turn, stronger earnings reports for ASX shares.

Economic growth vs. inflation concerns

While the drop in unemployment is a positive indicator, it's critical to compare it to other macroeconomic factors, like inflation.

With more people in the workforce, there could be an increase in wages, leading to inflationary pressures.

The Reserve Bank of Australia (RBA) carefully monitors wage growth as part of its inflation targets. Its goal is to tame inflation while maintaining relatively full employment.

RBA assistant governor Sarah Hunter detailed this in her speech to the Barrenjoey Economic Forum on Wednesday:

Conditions in the labour market are also typically reflected in the pace of wages growth, and tightness in the labour market has contributed to strength in wages growth in recent years.

Nominal wages growth appears to have passed its peak and has moderated since late last year, though wages growth remains solid.

Having said that, real wages, which matter more for households, have been weaker, reinforcing the costs of high inflation.

As it stands, among the primary concerns for policymakers remains inflation and unemployment.

ASX shares takeaway

The drop in Australia's real unemployment rate is a promising sign for the economy and could potentially boost ASX shares.

But there's no saying how this will translate over time, or if the 'good news' has already been priced in. However, a strong economy (including real employment) is typically good for the stock market.

Motley Fool contributor Zach Bristow has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Wesfarmers. The Motley Fool Australia has positions in and has recommended Wesfarmers. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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