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The Crucial Number

U.S. labor market softened slightly in July, according to government statistics released Friday. Nonfarm payrolls grew by a lower-than-expected 92,000 in July, the least seen since February. And the nation's unemployment rate rose to 4.6%, up from 4.5% in June and the highest reading since January, the Labor Department reported. Economists had been expecting payroll growth of about 133,000, according to a survey conducted by MarketWatch. The jobless rate was expected to remain at 4.5%. Some of the weakness came from a surprising 28,000 drop in government jobs in July. Excluding the government, private-sector payrolls rose 120,000. This was actually higher than the 107,000 private sector jobs created in May. Meanwhile, payrolls in May and June were revised lower by a cumulative 8,000. Jobs grew by 188,000 in May and 126,000 in June.

The equity market should like the mix in this report, just a whiff of weakness to keep rates low and enough private sector strength to keep hopes high," said Robert Brusca, chief economist at FAO Economics, in a research note. He said the weakness in government jobs wouldn't last going into the presidential-election cycle.

The weak job growth could add to worries that the economy is slowing. Second-quarter gross domestic product rose to a 3.4% annual rate from 0.6% in the first quarter, that is the positive undertone. Against this backdrop, the Federal Reserve will meet next Tuesday to set the course for U.S. interest rates for the next six weeks. The Fed maybe tempted to lower rates seeing the jitters surroundng the subprime consequences, in particular to Bears Stearns' continuing troubles.

Standard & Poor's downgraded its outlook for Bear Stearns Cos. added to Wall Street's credit-related worries. It was downgraded from stable to negative in light of potential litigation from the clients of the failed hedge funds. To me, all ratings agencies tend to be reactionary rather than anticipatory in nature. Just as they were 6 months late in downgading the mortgage business, the same is true now. That to me is another positive factor.

As explained, the unemployment rate is crucial as that will indicate if the Americans are able to ride out the subprime or credit tightening. To me, the data is neutral, however if more big investment banks get into more trouble, the jitters could permeate and dull the markets for some time yet. With tha in mind, the Fed faces its first big challange and should err on the side of caution by dropping rates.
p/s The Simpsons The Movie is one of the better cartoons for adults for a long time. Look for the scene where Bart skateboards naked, hilarious!


sopskysalat said…

can infer from the report that the data is crucial to you as well! tks for the timing write up.

i suppose our fears has turned into nightmares with the dow now on a plunge to a possible bottomless pit. Even major banks are unfairly punished. Now worries that the corporated debt market could also be heading for trouble thus sparking of a 'banking crisis'. As you advocate that what we are seeing is the end results of loosely giving credit, is the market now reacting ahead to a possible of credit squeeze in the months and years ahead? Where is that pit going to bottom out and when will confidence ride high again?
Citysleeker said…
Think we will need to sit this out for a few months. Once more subprime casualties are announced and the picture is clearer then we will see a bounce back. But for now, it's still a big question mark. No one knows the full extent of the subprime fallout. Sometimes the fear of death has a bigger impact than death itself...

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