Is There a Dark Clue Hidden in the Non-Farm Payroll Numbers?

by: James Picerno

Is the bond market finally right? It's starting to look that way.

On Thursday, we discussed the latest slide in the 10-year yield, and presumed that it reflects rising pessimism in the fixed-income set that future economic growth will disappoint if not evaporate completely. On Friday morning, the argument for that pessimism received another piece of supporting evidence in the August jobs report.

The Labor Department reported that non-farm payroll employment slipped by 4,000 in August from July. Statistically, that works out to a wash in a labor force numbering upwards of 138 million. Nonetheless, there are still several reasons to embrace the warning signal embedded in the report.

First, consider the chart below, which graphs the monthly percentage change in non-farm payrolls. It's clear that the trend has changed this year, and for the worse. Only the financial gods know for sure what comes next, but mortal observers will have no trouble drawing rather dark conclusions from the trend. An economy that had been creating jobs fairly steadily is now an economy that's treading water in minting employment opportunities. Is the next phase an economy that destroys jobs?

The trend looks better if you look at the pace of job growth on a year-over-year basis, as per our second chart below. By that definition, non-farm employment rose 1.2% in August, when compared to a year ago. But, the trend still doesn't inspire. An annual rise in jobs of 1.2% is the slowest in over three years and the downward momentum looks like it has a head of steam.

Then again, it's worth noting that last month's overall slippage in private-sector employment was due exclusively to job losses in construction, and manufacturing/goods producing. In contrast, the other major areas of private employment posted gains, including the single biggest source of private jobs: services employment, which rose by 0.5% in August.

The great debate now is whether the pain in the goods-producing area spills over into the broader employment picture. Optimists think the answer is no, which is an outlook that jibes with the forecast that the real estate correction will remain an isolated problem without triggering a recession.

Hope isn't dead, although it took another blow on Friday morning. Meanwhile, the case for dropping interest rates just got another bit of statistical support. This much, at least, is clear: each and every economic number dispatched will take on more importance than the one that preceded it order to sway Mr. Market's sentiment.