Friday saw just one economic release, but it was an important one. The employment situation report has a major impact on the stock market and gives a glimpse to many areas of the economy. Unfortunately for the bulls, August’s report was disappointing and foretells some weakness in the economy in the months to come.

There are several components in the employment situation report, each giving economists a varying view of the economy. The nonfarm payrolls data is figured from a survey of more than 400,000 businesses outside of farming. This businesses report the number of workers currently on their payrolls. This provides a figure showing the gain or loss in payrolls for the month.

For August, nonfarm payrolls fell by 84,000, their eighth straight decline. This was above estimates for a decline of about 75,000 payrolls. Adding insult to injury, data for June and July was revised lower by a total of 58,000 payrolls. Job losses were widespread across almost all sectors led by a drop of 61,000 jobs in manufacturing and a decline of 27,000 payrolls in the services sector.

Another major part of the employment report is the unemployment rate. This is often called the household survey because the data is gathered from a survey of about 60,000 households. The unemployment rate is calculated by taking the number of unemployed persons and dividing it by the total number of persons in the labor force. One key is that in order to be counted as unemployed, a person must be actively seeking for work.

In August, the unemployment rate unexpected shot higher by 4-tenths to 6.1 percent when a reading of 5.8 percent was expected. Unfortunately, a rise in the unemployment rate is a sign of a contracting economy and usually declining interest rates. The total number of unemployed rose to 9.4 million in August, well above the year ago figure of 7.1 million. However, interest rates are not falling much because of concerns about pricing pressures. One of these pricing pressures is a rise in wages, with the average hourly earnings component rising 0.4 percent in August, a tenth more than expected.

In the past year, wages have grown 3.6 percent, but inflation has made the net impact of these gains minimal. The general feeling is that as the economy slows, pricing pressures will ease and this is one reason why the Fed has left rates unchanged. Now that the economy is slowing possibly faster than anticipated, the Fed has a tough decision to make about spurring economic growth while keeping inflation down.

At least energy prices are easing, which is easing some of the pricing pressures. On Friday, crude is down once again, trading below $107 despite the fact several more hurricanes are on the horizon. The fact is that global economic growth is slowing and this will lead to less demand for crude. Though prices are about $40 a barrel lower than they were just a few months ago, we still are seeing prices 7 to 8 times higher than they were several years ago.

Next week’s economic calendar is rather light until the end of the week. Data on international trade, import and export prices, producer prices and retail sales will all be released the last two sessions of the week. Despite the disappointing employment data, stocks have battled back from morning lows. Maybe stocks are finding support after hitting official bear market territory on Thursday. The FOMC meeting is set for September 16 and this meeting will get plenty of attention with traders interested in hearing how the Fed plans to deal with problems in the economy.


Jody Osborne

Senior Staff Writer & Options Strategist

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