A Framework That Provides Clarity

During periods of “low visibility,” confusion reigns: for every indication of one trend, there seems to be a countertrend. The key is to glean from the collective wisdom of reliable leading indicators a clear signal that the economy is headed for a turn.



Jobs data may raise questions

Friday's employment report will likely show sizable job growth for September, emboldening investors who drove the Dow Jones industrial average to a record high this week, but that won't tell the whole economic story.

If economists' projections for solid payroll gains but also a rise in the unemployment rate prove correct, there will likely be plenty of data to support arguments both for and against an imminent U.S. recession.

A combination of outsourcing, offshoring and tight cost controls mean Corporate America is running leaner than it was before the most recent recession in 2001, so employers may be slower to cut jobs despite signs of cooling demand.

"U.S. firms may not see as much excess in their work forces at the present time as they have in past cycles when demand faltered," Goldman Sachs economist Ed McKelvey wrote in a recent note to clients.

That would mean a rising unemployment rate as companies cut back on hiring and those who are out of work have a tough time finding new jobs, but not necessarily the full-blown recession that normally accompanies a swift spike in job losses.

Another factor to watch is where the job growth is occurring. When payrolls unexpectedly fell in August, it was largely because of a surprisingly steep drop in government jobs, which many economists dismissed as a faulty seasonal adjustment at the start of the school year.

If a large portion of the September job growth comes from a rebound in government payrolls, "that's not a strong report," said J.P. Morgan economist Haseeb Ahmed.


The Labor Department's monthly employment data always get a lot of attention on Wall Street, but with investors hyper-sensitive about the health of the U.S. economy amid a housing recession, this week's report is magnified.

August's weak report heightened talk of a downturn because with jobs come paychecks, and that means consumer spending, which is the backbone of the U.S. economy.

Those who think a soft landing is in order contend the tightening credit conditions that roiled global financial markets in August clearly took a toll on the economy, but it was likely short-lived. They argue that as credit markets unfreeze, companies and consumers will resume spending.

Weekly claims for unemployment benefits rose in the latest week, but not dramatically, supporting the view that companies are not firing workers en masse.

But other gauges suggest there is cause for concern.

Spending has already taken a hit from high oil prices and rising mortgage payments, so a spike in unemployment could prove fatal to the expansion phase now in its sixth year.

"Friday's report is particularly important because the labor market currently looks to be on the cusp between the performance typically seen in mid-cycle slowdowns and that typically seen at the start of a recession," said Goldman economist Jan Hatzius.

"Any further deterioration from the performance seen over the past six months would put the labor market into territory that has previously only been seen in outright recessions."

The Labor Department will also report on the average number of hours worked per week and average pay per hour -- both key factors in whether the mighty U.S. consumer can sustain the current expansion.

Economists at Merrill Lynch found that during the last three consumer-led slowdowns, the average work week declined by 0.4 hour from the peak before spending stalled. So far, that measure has come down by 0.1 hour from a recent peak of 33.9, so Merrill sees a drop to 33.5 hours as a key threshold.

If hourly earnings fall on a year-over-year basis, that would also be a warning sign for the economy. For August, average hourly earnings were $17.50, well above the $16.81 average for August 2006.

With economists certain to debate what Friday's report means for the U.S. economy, the moral of the story is, don't put too much faith in any single piece of government data, said Lakshman Achuthan, managing director of the Economic Cycle Research Institute in New York.

"There is no holy grail of economic forecasting," he said.