Today's Key Employment Release: Average Workweek Data

The best way to get a sense of how the labor market is holding up could come from an unlikely component of tomorrow's January employment report.

Normally, the fluctuation in the unemployment rate or the growth in new nonfarm payrolls serve as the best gauge of strength in the job market. But this time out, the average workweek looks to be the component to watch. The unemployment rate and payrolls figure, while valuable, are likely to only confirm what the market knows -- the economy is weakening.

However, the workweek figure has recently gained in importance because it can serve as a measure for how aggressively employers are responding to decreasing demand for goods and services. Hours are already being cut -- the workweek fell to 34.1 hours in December, the lowest reading since January 1996.

"It's not the payroll numbers, because we're in a recession," said Brian Jones, economist at Salomon Smith Barney. "The question is, how deep is it going to be and how long is it going to go on, and you have to see whether people cut back the workweek further. Usually, you work your existing people less hard, then you slow hiring and then you lay people off."

Jones believes the workweek will drop to 33.9 hours worked, which would be a record low for that figure since the Labor Department started tracking it in 1964. During the 1990-1991 recession, the average workweek floated between 34.1 and 34.4 hours before increasing to about 35 hours per week. In the manufacturing sector (which accounts for about 16% of the labor market), average weekly hours fell to 40.4 in December, the lowest since January 1996 as well, representing cutbacks not seen since the last recession.

Once employers find it harder to meet their costs simply by cutting back hours, they'll stop hiring and lay off workers more indiscriminately. Recently, a number of prominent companies (even those outside the dot-com sector!) have started to lay off workers, especially in the manufacturing sector, which, judging by this morning's National Association of Purchasing Management'spurchasing managers' index, is certainly in a recession.

Discussion of layoffs attains greater prominence when there's a perception that the economy is lagging. Layoffs have indeed increased in recent months, as the weekly initial jobless claims figures show, although it's hard to pin the state of the labor market on which layoffs make the biggest splash in the headlines.

"It's concentrated, to some extent, in the manufacturing sector, which is in a free fall. It's the hardest-hit sector in the economy," said Anthony Karydakis, senior financial economist at Banc One Capital Markets. "The overall signs are there. Everything is telling you the same story -- there is a dramatic deterioration in the economic environment."

Because of that, it makes the usual headline figures, like the unemployment rate and the new nonfarm payrolls figures, second banana. And perhaps this time they should be.

The consensus forecast for the unemployment rate is for a slight increase, to 4.1% from 4%. That doesn't provide any real insight beyond what is already assumed -- that the labor market is slowing. It also doesn't provide any clues as to where the labor market, which is generally a lagging indicator of economic strength, is headed over the next six months. Other economic reports, such as retail sales and business investment, are a better gauge of that.

Nonfarm payrolls are expected to increase by 83,000 for the month of January, again confirming that the pace of job creation has slowed markedly in recent months. December's increase of 105,000 is likely to be revised downward as well.

Average hourly earnings are expected to increase at a rate of 0.3%. An increase of either 0.3% or 0.4% will bring the year-over-year rate of increase to 4.2%, but the Federal Reserve isn't worried about inflation right now, and the most recent Employment Cost Index shows that wage costs aren't spinning out of control.