Today's Jobs Report Will Hold Key Clues to the Economy

The labor market is a giant beast, and as such, it takes a lot to detour it from the path it's traveling. The current route is one of increasing layoffs and rising unemployment, and Friday's employment report is likely to show a continuation of the trend.

Still, the weakening job market has not caused a massive economic downturn because so many people remain employed and have kept spending, albeit at a slower pace.

But the pace of new job creation has slowed, despite better-than-expected economic growth in the past few months. Friday's jobs data are expected to show that nonfarm payrolls rose by just 5,000 in April. The unemployment rate is expected to rise to 4.4%. The unemployment rate has been moving steadily upward since October, when it stood at 3.9%, but is still at historically low levels.

Could the Recent Party Be Over?

If Friday's numbers are substantially weaker than expected -- and the thinking is that could be the case -- the report could disrupt the market from its recent good cheer. Stocks have essentially been in rally mode since early April, due mostly to the idea that the economy is in better shape than expected and is even on the road to recovery.

"We're in the phase of the softening here," Peter Kretzmer, senior economist at Bank of America, says of the labor market. He expects nonfarm payrolls to have fallen by 30,000 in April. "We're in the phase where adjustments are clearly being made at the production level, and they're clearly affecting employment."

On top of the rising unemployment rate, other indicators have been showing a steady worsening in the labor market. Weekly initial jobless claims last week reached their highest level since the week of March 23, 1996. More worrying, the number of people on state benefit rolls has been rising, showing that those getting laid off are having a harder time finding another job.

And other, more esoteric indicators also point to problems, such as the Labor Department's diffusion index, which measures hiring trends around the country. The index fell to 46.5 in March from 50.6 in February. This was the first time since 1992 that the figure was below 50. When it drops below that level, it signifies there are more industries not hiring than hiring workers.

Consumers Stay Strong

Still, job losses racked up over the past several months have not been deep enough to crack consumers, who account for two-thirds of the economy's output. Auto sales have been holding up, and housing and retail sales were both strong in April.

Recent gains in wages might have something to do with why consumers have kept spending. Since the end of 1999, wages have been gaining. Economists expect average hourly earnings rose 0.3% in April. In March, they were rising at a 4.3% year-over-year rate, putting raises above the inflation rate. Wages, however, are expected to plateau in the coming months.

"Away from the labor market, things don't look too bad," says Brian Jones, economist at Salomon Smith Barney. "This is the one thing that stands out as the problem."

For the Federal Reserve , it's a big problem. It's concerned that accelerating layoffs will further dent consumer confidence and result in an even sharper pullback in spending. Recent surveys show that consumers are increasingly concerned about job security. Consumer confidence, which rebounded in March for the first time since the early fall, resumed its downward slide in April. It's one of many reasons why the Fed has cut interest rates by 2 percentage points in the span of just four months. But it takes six to nine months for rate cuts to work their way into the economy. The Fed is crossing its fingers, hoping that until the benefits of lower rates kick in, companies will keep employees on the payroll and deal with squeezed profits in other ways.

Jones expects to see a furthering in the trend of job losses spreading from the manufacturing sector -- which has been mired by a pullback -- into other areas. Manufacturing likely lost another boatload of jobs in April. The most recent report from the National Association of Purchasing Management, released Tuesday, shows that manufacturers are sharply cutting back on workers.

Jones expects Friday's report to show a loss of 75,000 jobs, led by a loss of about 60,000 manufacturing jobs. If payrolls decline in April, it will be the second straight month this has occurred. With the exception of last year, when an auto strike affected the figures, this would be the first two-month decline since early 1992.

In the past several months, poor performance of the manufacturing sector has bled into the "temporary help" sector of the economy, where 273,000 jobs have been lost. This pocket could show even more weakness in April. Another potential weak spot is retail, which lost 46,000 jobs in March. At this time last year, the economy was still averaging a gain of about 250,000 new nonfarm jobs a month.

If Friday's report shows reasonable job gains -- or even if it comes out in line with economists' consensus expectations -- it will probably further the recent mood on Wall Street that the overall economy is improving. But two straight months of job losses will likely alter that sentiment.

Beginning with Friday's report, they'll have a better idea.

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