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Updated from 3:31 p.m. ET to reflect the stock market's finish.



) -- It's one thing for employment data to miss expectations. It's quite another for the economy to actually begin to lose jobs.

That could be the case in August though, according to research firm

Capital Economics

, which nailed the initial estimate of second-quarter GDP at 1.3% in late July. The firm describes a scenario where fears about a double-dip recession give corporations the jitters and notes that there is an historical precedent for expecting a decline in the wake of such extreme market volatility as the market's withstood this month.

"There is a real danger that the recent economic slowdown and financial market turmoil resulted in non-farm payroll employment falling outright in August, perhaps by around 25,000," the firm wrote on Thursday. "That wouldbe the first decline since February 2010 and would spook both the markets and the Fed."

Capital Economics

also pointed out that July's increase in non-farm payrolls of 117,000 likely doesn't reflect the impact of the slowing in GDP growth in the first half of 2011. The second estimate of second-quarter GDP arrives Friday morning at 8:30 a.m. ET and the consensus is calling for a dip down to 1.1%. Real GDP for the first quarter was revised down to 0.4% from 1.9% in the last

report on July 29


The history angle comes from the fact that in the four instances since 1997 when the major U.S. equity indices have dropped by at least 10% in the month preceding the payroll survey -- as has happened this time around prior to Aug. 12 when the survey was conducted -- non-farm payrolls fell in that same month.

Taking it back even further, the evidence still seems to point to a likely decline.

"If we extend the analysis back to the 1960s, then payrolls have fallen nine out of the 13 times that equity prices have dropped by 10% or more," the firm wrote. "In other words, history suggests that there is a 70% chance that payrolls fell in August."

How the stock market would greet such news is debatable in the wake of the pullback the major U.S. equity indexes have already endured but a decline would be a blow to the

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Federal Reserve

, which heretofore has at least been able to claim it stabilized the employment picture in the face of its inability to foster meaningful improvement.

Nervousness ahead of Friday's speech by Fed chairman Ben Bernanke at an annual economic conference in Jackson Hole, Wy. was

contributed to weakness in stocks

on Thursday after three straight days of gains. The resignation of Steve Jobs as CEO of



also soured market sentiment a bit, along with anxiety brought on by a sharp selloff in Germany, although Apple's stock finished down marginally.


Dow Jones Industrial Average

lost 1.5% to close at 11,150, while the

S&P 500

slid 1.6% to 1159 and the

Nasdaq Composite

dropped 2% to 2420.

Capital Economics

said its model points to a drop in private payrolls of 5,000 for August, along with a decline of 20,000 in government jobs. The firm noted that the strike by



workers in mid-August adds downside risk to its estimate.

As for the impact of a decline on stocks,

Capital Economics

said that "at the very least" a fall would "underline the fragility of the recovery." But with the


still hovering around 40, there's probably too much skittishness out there to realistically expect Wall Street to take the news in stride, especially given the exclamation point the news would put on the Fed's ineffectiveness.

The Bureau of Labor Statistics will release its employment situation report for August on Sept. 2.


Written by Michael Baron in New York.

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