My forecast for payrolls in September was 70K at most against a delusional consensus of 120K. I must admit I was overoptimistic as the actual payroll increase was only a dismal 51K. As I said on October 3rd (but I had argued the same weeks before) : "I expect that September payroll figures could be as low as 70,000 (against a consensus of 128,000)".

Of course perma-bulls will now spin the story pointing to the upward revision in the August figures and to the rebenchmarking of the data. But the reality is that the economy is sharply slowing down today (to a Q3 growth between 1% and 1.5%) and that employment is now taking a serious toll even before the beginning of a formal recession . The data today are consistent with my prediction that the economy is headed towards a recession in early 2007.

The details of the report are even worse than the headline as the fall in the construction sector has not even started: construction jobs were up 8K in September but are likely to sharply fall in the months ahead as the housing bust finally triggers the employment fall in the housing and housing related sectors. Construction jobs are still up for two reasons.

First, it takes 9 to 12 months to build a home and the construction job data are still reflecting the high housing starts of early 2006; once those homes are finally built - as late as the next three months - expect employment in the construction sector to sharply and dramatically fall (as much as 40-50K jobs per month). Still, jobs in residential construction already fell 15K in September matched by the increase in non-residential construction.

Second, non-residential construction has done better than the busting residential one and has been a source of job growth. But once the housing sector leg of the employment sharply falls you can expect - as it is already predicted by leading investment houses such as Goldman Sachs - very sharp reductions in housing and housing related emplyoment that will not be compensated by the much smaller non-residential construction sector. Also, while non-residential construction is still perky, the overall economic slowdown will soon lead to a sharp slowdwon in non-residential construction, in tune with the sharp slowdown in other forms of corporate capital investment in machinery, equipment and software (an investment that was already down in real terms in Q2).

Note also that employment is a lagging indicator of the business cycle. Labor market indicators are well known to be lagging rather than leading. When demand first slows down, firm do not cut production or employment; they just let inventories of unsold goods to increase. Only after the fall in sales persists for a while firms will start to cut production to avoid an excessive pile up of unsold goods. And even then firms will tend to hold on their workers – and cut production via reduced capacity use - as losing skilled workers is costly: it is only when the fall in demand and production is significant enough that workers are fired and jobs cut. Thus, employment is a lagging indicator of the business cycle; and the fact that job growth has been so bad in Septbember in spite of the economy not being yet in a full fledged recession is an ominous signal for what the labor market will do once the slowdown and recession will come into full swing. Thus, the stable unemployment rate in the data today is meaningless being an even more lagging indicator of the business cycle than employment is. Also note that once you start seeing slack in the job market discouraged workers get out of the labor force (they go back to school or stay at home if they have children) and thus the unemployment rates fails to fully reflect the  growing slack in the labor market. 

In conclusion, this is the worst employment report in years and it is an ominous signal of the rising risks of an economic recession in 2007. If employment growth is this bad at this stage, it will be much worse in the months ahead when the effects of the housing bust will start to be reflected in the employment figures and in the broader economy. 

You can also watch my interview this morning with Forbes.com on the payroll figures. And this afternoon at 4pm I will be on CNBC to discuss these figures and what they imply for the economy. 

And here is the Forecasters' Wall of Shame (and why forecasters are systematicallly biased towards optimism is discussed in detail in a previous blog of mine)

                        Bloomberg Survey     FIRM                     Nonfarm  Unemploy Avg Hrly Consumer                             Payroll    Rate   Earnings  Credit    ------------------------------------------------------------    Number of replies           73       73       57       35    MEDIAN                     120      4.7%     0.3%     $5.0    AVERAGE                    120      4.7%     0.3%     $5.5    High Forecast              200      4.9%     0.5%    $10.0    Low Forecast                50      4.6%     0.1%     $0.0    Previous                   128      4.7%     0.1%     $5.5    ------------------------------------------------------------    ABN Amro                   150      4.7%     n/a      $4.4    4CAST Ltd.                 140      4.7%     0.4%     $7.5    Action Economics           125      4.7%     0.3%     $8.0    AIG Global Invest.         147      4.7%     0.2%     n/a    Alleti Gestielle SGR       115      4.7%     n/a      n/a    Allianz Dresdner           100      4.9%     0.4%     n/a    Argus Research Corp.       105      4.6%     n/a      $5.2    BMO Capital Markets        125      4.7%     0.3%     $5.0    BNP Paribas                105      4.8%     0.3%     $3.0    B of A Capital             110      4.8%     0.3%     $7.5    B of A Securities          100      4.8%     0.3%     $4.0    Bantleon Bank AG           110      4.7%     n/a      n/a    Barclays Capital           140      4.7%     0.4%     n/a    Bear Stearns               125      4.7%     0.1%     n/a    Bank of Tokyo-Mitsubishi   130      4.7%     0.3%     $7.0    Briefing.com               115      4.7%     0.3%    $10.0    Calyon                     110      4.7%     0.3%     n/a    CIBC World Markets         130      4.8%     0.2%     n/a    Citigroup                  200      4.7%     0.5%     $6.5    ClearView Economics        125      4.7%     0.3%     $6.5    Commerzbank                130      4.8%     0.3%     n/a    Countrywide SEC            110      4.7%     0.4%     $3.0    Credit Suisse              120      4.7%     0.3%     n/a    Cube Financial             100      4.7%     0.3%     n/a    Daiwa Securities           100      4.7%     n/a      $8.5    Danske Bank                130      4.7%     n/a      n/a    DekaBank                   110      4.8%     0.3%     n/a    Desjardins Group           115      4.8%     0.2%     $8.0    Deutsche Bank Research      50      4.8%     0.3%     $2.0    Deutsche PostBank          120      4.7%     n/a      n/a    Dresdner Kleinwort         110      4.8%     0.3%     $4.0    DZ Bank                    110      4.7%     0.3%     n/a    Essen Hyp.                 100      n/a      n/a      n/a    FTN Financial              100      4.7%     0.3%     n/a    First Trust Advisors       140      4.6%     0.3%     n/a    Fortis                     140      4.7%     0.4%     n/a    Global Insight             130      4.7%     0.3%     n/a    Goldman Sachs              100      4.7%     0.3%     n/a    High Frequency Economics   100      4.7%     0.3%     $7.0    HSBC Markets               100      4.7%     0.3%     $6.0    HypoVereinsbank            125      4.7%     n/a      n/a    I.D.E.A.                   113      4.7%     0.1%     $4.4    ING Financial Markets      125      4.7%     0.3%     $4.2    Informa Global Markets      90      4.8%     0.3%     $7.0    Insight Economics          135      4.7%     0.3%     $4.5    IntesaBci                  100      4.8%     n/a      n/a    J.P. Morgan                120      4.7%     0.3%     $7.0    JPMorgan Asset Mg          115      4.7%     0.2%     $4.0    Lehman Brothers            125      4.7%     0.3%     $4.0    Maria Fiorini Ramirez      129      4.7%     0.3%     n/a    Macroeconomic              120      4.7%     0.3%     n/a    Merrill Lynch              110      4.7%     0.3%     $8.2    Moody's Economy.com        115      4.7%     0.2%     n/a    Morgan Stanley             140      4.7%     0.3%     n/a    National Bank Financial    150      4.7%     0.3%     n/a    National City Bank         114      4.7%     0.4%     $7.2    Nomura                     130      4.7%     0.2%     n/a    Nord/LB                    110      4.7%     n/a      n/a    PNC Bank                   105      4.7%     0.3%     $3.6    Promotora Bursatil         n/a      4.7%     n/a      n/a    RBC Capital Markets        110      4.7%     n/a      n/a    Regions Financial          115      4.7%     0.3%     n/a    Ried, Thunberg & Co.       125      4.7%     n/a      n/a    Scotia Capital             140      4.7%     0.2%     $0.0    Societe Generale           145      4.7%     0.3%     n/a    Stone & McCarthy           120      4.7%     0.4%     $5.0    TD Securities              135      4.7%     n/a      n/a    Thomson/IFR                105      4.7%     0.3%     $6.5    Tullett Prebon             130      4.7%     0.2%     n/a    UBS Securities LLC         125      4.7%     0.2%     $5.0    Univ. of MD                125      4.7%     0.3%     $5.0    Wachovia                   112      4.7%     n/a      n/a    Westpac Banking            125      4.8%     n/a      $4.0    Wrightson                  125      4.7%     0.3%     n/a

    Roubini (RGE)                        70 (not in the list of the Bloomberg survey of official forecasters)