Jobs data shows economy slowing, not stalling

By Emily Kaiser - Analysis

WASHINGTON (Reuters) - Feel free to breathe a sigh of relief, but don't get too comfortable.

Friday's U.S. employment report all but silenced talk of an imminent recession, although the data showed an economy clearly bruised by a brutal housing downturn and still vulnerable to another shock.

"Given the rebound in hiring, can we now say the economy is certain to avoid a recession? Yes. But it's not a slam-dunk forecast," said Bernard Baumohl, managing director of the Economic Outlook Group in Princeton Junction, New Jersey.

Even as Wall Street celebrated a 110,000 gain in September jobs, and a huge upward revision to August's originally dire data, there were some painful reminders of why many investors had been so fearful of a looming recession.

Merrill Lynch & Co MER.N announced a whopping $5.5 billion in write-downs for bad bets on subprime mortgages and leveraged loans.

Washington Mutual Inc (WM.N), one of the largest U.S. mortgage lenders, expects a 75 percent drop in quarterly income because of losses and write-downs on mortgage loans and securities.

The jobs data itself showed a continued decline in construction and manufacturing employment, as well as financial-related positions, clear signs of the housing meltdown at the root of recession fears. For details, see ID:nN05467319

"The much-awaited September payroll report reduced recession fears aroused a month earlier, but left intact evidence of gradual cooling in the U.S. labor market," said Peter Kretzmer, senior economist with Bank of America.

He pointed out the September strength and upwardly revised August figure reflected big gains in government employment "while private payrolls remained on their gradual softening track."

Indeed, the government accounted for 37,000 of the new jobs. Government payrolls are usually considered a poor indicator of underlying economic conditions because the government is not directly dependent upon customer demand.

In the private sector, the biggest gains came from health care, food service, bars and hotels.

Overall, the Labor Department said from June to September, employment growth averaged 90,000 per month. For the first five months of 2007, average growth was 147,000 per month.

BETTER THAN NOTHING

Some employment growth is certainly better than none, but analysts at Lombard Street Research said the latest figures were consistent with economic growth of about 1 percent -- less than half the long-term growth trend.

"Recent payroll jobs growth at or below a 1 percent rate imply real gross domestic product growth has been around 1 percent," analyst Charles Dumas wrote in a research note.

That would suggest little margin of error, and no room to absorb another shock should the housing downturn and credit crisis further restrict corporate or consumer spending.

The good news is, the employment report showed a bigger-than-expected increase in wages, which should bolster consumer spending -- although it may upset those who worry that the Federal Reserve's interest rate cut last month would stoke inflation.

The Standard & Poor's index of retailers .RLX jumped 2.5 percent near midday on Friday, reflecting those improved spending expectations. Whether they carry through until the vital Thanksgiving-to-Christmas holiday season remains to be seen.

"The upcoming holiday selling season may be the first big test as to whether the housing slump is taking a toll on consumers, but for now the job market indicators suggest that the troubles are not spreading to other areas of the economy," said John Challenger, chief executive officer of outplacement consultants Challenger, Gray & Christmas.