Another Rough Jobs Report: This Trend Has Legs

by: James Picerno

This week has witnessed some encouraging news on the economic front, but this morning's update on payrolls will mute any temptation for celebrating.

Indeed, the unemployment rate surged upward to 5.5% last month from 5.0% in April, the Bureau of Labor Statistics reports. The jobless rate is now at its highest since October 2004. And let's not forget that unemployment reports are the most politically sensitive economic number and that this is a political year. As a result, we expect the echo chamber to ring loud and clear over this report. Prepare yourself for a hefty dose of discouraging chatter about jobs and the economy this weekend and into next week.

Perhaps that's appropriate, considering that the economy continued to shed jobs in May, as our chart below shows. In every month of 2008 so far, nonfarm payrolls have shrunk.

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There's simply no way to spin the reality that the economy is on the defensive. The pain isn't necessarily deep or wide, at least not yet. But there's no denying the trend.

Still, it's been tempting at times this week to think otherwise. Yesterday's news that retail sales for May exceeded analysts' expectations was taken by some as a sign that the worst is behind us. Another potential bright spot was the drop in jobless claims for last week, which surprised economists and inspired some to declare that the economy was finally on the mend.

But the danger of reading too much into any one number is quite high at a moment such as this, when the economic cycle is in transition, which tends to produce more than the usual array of conflicting data. That's what makes the continuous decline in payrolls so forceful. The fact that the trend is now five months old, with no break, suggests that this trend, alas, has legs. A fundamental shift in the economy is underway, and it's not clear that cheap money alone will set the ship right.

But that's rank speculation. As for the fact: the decline in jobs last month was led by the goods-producing sector, which shed 57,000 positions in May. Meanwhile, the services industry, which provides the lion's share of employment in the U.S., barely grew last month. What's more, subsectors of services are now shrinking, including retail trade.

Once again, the lesson for strategic-minded investors is one of patience. The hope that all that ails the economy will quickly pass is, in this editor's opinion, still premature. Although there's been a correction in several of the major asset classes over the past six months or so, there's still a sense that the bulls never quite threw in the towel, which suggests that bigger bargains may be coming in terms of valuations once the all the dirty economic and financial laundry is recognized and accepted by Wall Street and its minions.