Yesterday we said we were impressed by the labor market’s ability to hold up relatively well against what some said was an approaching recession. What a difference a day makes! Today, we’re far less impressed. In fact, we’re surprised by the sharp downturn in job creation last month. Score one more for those who think the Fed will soon begin cutting interest rates.
Meanwhile, we can ponder the implications of September’s meager rise of 51,000 in nonfarm payrolls. A lesser number on this front hasn’t been seen since October 2005’s 37,000 advance. Of course, one could write off the previous dip as the extraordinary fallout from Katrina, which temporarily threw the labor market off its stride in September and October of last year. Indeed, the slide was more than reversed in November 2005, when nonfarm payrolls soared by 354,000, followed by a string of lesser but still robust months of job creation.
Alas, that kind of rebound from last month’s dip looks remote this time. With the real estate market cooling and a number of other economic metrics softening, job creation is now taking it on the chin.
The sectors of the economy that posted outright declines in jobs were in the cyclical corners of goods producing, manufacturing and retail, collectively shedding 42,000 positions last month. As usual, the service portion of the economy came to the rescue by delivering the lion’s share of the gains: a total of 62,000, although that’s a bit thin by the service sector’s standards.
The other bit of encouraging news in today’s employment report is that August’s payrolls rose by 188,000, up significantly from the initial estimate of 128,000. Meanwhile, the national unemployment rate fell to 4.6% in September from August’s 4.7%. The implication: jobs are still growing faster than the population, wrote Charles Dumas of Lombard Street Research in a note to clients today.
There’s also some technical number-crunching going on related to so-called benchmark revisions. Reportedly, the annual revision will be unusually large, perhaps giving a new bullish aura to the past profile of job creation.
Hope springs eternal, even if it’s technical in nature. These days, the stock market bulls aren’t picky about where they get their inspiration. Regardless, it’s all about the future now, and the trend of slowdown increasingly looks baked into the economic cake. The bond market will cheer, as it has been doing for months. Until and if some new report changes the perception, we think we know what we’ll be getting for Christmas.
The key questions now: How can the stock market maintain its cheery outlook in the wake of this morning’s news? Also, now that the slowdown looks closer to fact rather than speculation, will it produce what the Fed desperately needs: a commensurate slowdown in core inflation?

Today’s addition to the WM library is an interview with Ross Miller, a professor of finance at the State University of New York at Albany and president of Miller Risk Advisors. In our chat, he discusses his active expense ratio with your editor in the October issue of Wealth Manager. Miller designed the quantitative measure to shine a light on the true cost of active management. As he sees it, his gauge offers much improvement over the gross expense ratio that’s typically used for comparing costs among mutual funds. The metric’s details are outlined in his original working paper, “Active Expense Ratios and Active Alphas,” which is available via a link on his web site and is forthcoming in the Journal of Investment Management.