The week's economic reports

A strong rebound in the labor market highlighted a week of otherwise disappointing news for both housing and manufacturing. Stocks and bonds ended the week with the S&P 500 Index up 2.0 percent to 1,557, now up 9.8 percent for the year at a new all-time high, and the yield of the 10-year U.S. Treasury note rose 7 basis points to 4.64 percent.

ISM Manufacturing Index: Manufacturing activity continued to expand in September, the ISM's manufacturing index registering 52.0, still slightly above the 50 mark that separates expansion from contraction. But, in a continuation of a trend now stretching out over three months, the rate of growth continues to slow after peaking in June when the ISM index registered 56.

New orders, production, prices, and inventories all declined in September, though the drop in inventories (from 45.4 to 41.6) may be beneficial in that lower inventories could spur future production. Costs fell (from 63.0 to 59.0) but remain the highest individual component in the index, down from over 70 during the last year. This is yet one more piece of evidence that the manufacturing rebound of earlier this year has about run its course as growth continues to slow.

Pending Home Sales: Pending home sales in August hit an all-time low, failing to even reach the level of September 2001 following the terrorist attacks in New York, Washington D.C., and Pennsylvania. The index of homes placed under contract fell 6.5 percent from July to August and now shows a year-over-year decline of 21.5 percent.

Quickly eroding consumer attitudes toward the purchase of real estate and the lack of available mortgage money have caused activity to slow to a crawl during what is normally a busy time of the year. The National Association of Realtors reported that 10 percent of sales contracts fell through at the last moment due to canceled loan commitments and, in some areas, 30 percent of signed contracts were canceled due to the credit crunch.

ISM Non-Manufacturing Index: Growth in service sector activity slowed only marginally in September, the ISM non-manufacturing index still showing healthy expansion at 54.8 after a reading of 55.8 in August. The employment component rose from 47.9 in August to 52.7 in September, another sign that the U.S. labor market, while not robust, continues to create jobs.

Employment Report: Employment in the U.S. rose 110,000 in September and the number of jobs created in August was revised upward, from 4,000 to 89,000, largely a result of a statistical fluke in the number of teaching jobs previously reported that has now been revised. On a year-over-year basis, nonfarm payrolls gained 1.2 percent in September, a decline from the 1.3 percent growth rate in August.

Interestingly, as part of the Labor Department's annual benchmark revision, job creation for the year ending in March 2007 was revised downward by 297,000. This is the first indication of what are likely to be large downward revisions for job creation during 2007 as the birth/death model estimates will surely prove to have been overly optimistic in predicting job creation due to the formation of new companies during weakening business conditions for the construction, manufacturing, and finance industries.

Over the last year, the birth/death adjustments have accounted for more than two-thirds of all new jobs, a sharp increase over the levels of previous years. Despite the rebound in September and prior to any future revisions, the multi-year trend in job creation remains the same - a steady decline in job growth since late-2005 as shown below.

September job gains were seen in Education and Health Care (+44, 000), Government (+37,000), Leisure and Hospitality (+35,000), and Professional and Business Services (+21,000) while Manufacturing (-18,000) and Construction (-14,000) both posted losses.

With nine months of data now in the books for 2007, health care is the clear leader in employment growth as shown below. Of the almost half million new jobs in the Education and Health Care Services category, only 91,000 of these are education related - the health care industry has created a whopping 377,000 new positions and is ahead of all other categories by a wide margin. Employment gains in food service, within the Leisure and Hospitality category above, come in second to health care with 240,000 new positions so far in 2007.

The rebound from August to September was expected and it will take some pressure off of Ben Bernanke and the Federal Reserve regarding monetary policy, lessening the probability of another interest rate cut later this month, however, the recent trend should be troubling to all policy makers - health care, food service, and government as the engines of employment growth can not be interpreted as a sign of a healthy economy.

Summary: Though there is a good deal of uncertainty in the labor report due to birth/death model estimates, massive revisions that are now routine, and other oddities, there can be no doubt that last month's 4,000 job loss was an anomaly rather than the beginning of a trend. Neither unemployment claims nor the ADP payroll data show any significant stress in the labor market today, though there is a clear trend downward in job growth over the last two years. Despite the questionable quality of that growth (health care, food service, and government jobs) these are still real jobs that pay real money, which should be supportive of consumer spending that drives economic growth.

Manufacturing continues to fall off from the spring highs with little indication of a rebound ahead and real estate statistics continue to plumb new lows. Bottom calling for the housing market has intensified over the last week or two after truly horrendous reports that reflected activity during the onset of the credit crunch in August.

Consistently high growth in consumer credit in recent months reflects the consumers' willingness to fund purchases via new credit card debt rather than home equity withdrawal, as the latter source of funding fades along with elevated home prices. Initial indications for the consumer spending component of third quarter economic growth show only a marginal slowdown in consumption, providing more evidence that counting out the American consumer is one of the longest running losing bets around - more will be known on this subject in a few weeks when the first look at third quarter GDP is released.

The Week Ahead: The week ahead will be highlighted by a report on retail sales on Friday. Also scheduled for release are the Fed meeting minutes on Tuesday, import/export prices and international trade on Thursday, and producer prices and consumer sentiment on Friday.