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Today's employment data cap off a month's worth of signs that economic growth is moderating. The nonfarm payroll gain of 112,000 for the month of June was well below the consensus forecast for a 250,000 gain. About half of the forecast miss was due to a decline in manufacturing jobs and a lack of growth in construction jobs, while the rest was spread among numerous sectors. However, it's probably best to put today's report, as well as the others, in the context of recent strength.

The extraordinary vigor seen over the past few months probably borrowed from future months, owing to pent-up demand that built up in the second half of 2003. The case for continued economic expansion remains excellent, owing to solid fundamental underpinnings. Concerns about the expansion's durability hold very little water.

The sense of moderating economic growth is now pervasive, as is quite apparent in the U.S. Treasury market. The yield on the 10-year Treasury note has fallen to 4.45% from a peak of 4.90% in a matter of just a few weeks. Hints about this moderation have been noticeable for weeks, a theme I've been stressing in my recent columns . The view gained momentum throughout June, making it likely that the market is now largely discounting the notion of moderating economic growth.

The key focus for the markets now is on the depth of the moderation. The best scenario for the markets would be one in which economic growth is neither too hot nor too cold. The economic growth rate of the past year was too hot, given that it was resulting in a rise in the inflation rate and interest rates. So, the current moderation in growth is very favorable for the markets because it will help to prevent any further acceleration in the inflation rate. Growth is therefore more likely to be sustainable, as it's better for the economy to grow at a steady rate than to experience boom-bust conditions.

Getting Some Perspective

To put today's payroll data into perspective, the economy has now added roughly 1 million workers over the past four months, a much faster pace than the average during the 1990s expansion. While the pace of job growth might be slowing, we're now likely entering a more sustainable growth rate of about 200,000 to 250,000 jobs per month instead of the recent extraordinary pace of about 300,000 per month.

One particularly weak aspect of the report might give some investors the impression that the economy is weakening, but it's probably due to a technical factor. Specifically, the index of hours worked, which measures the total number of hours worked in the economy, fell 0.6% in June despite the 112,000-job gain. The main reason was because of a decline in the average workweek, which fell to 33.6 hours from 33.8 hours, the lowest level since last December.

That decline could be attributed to factors related to the observance of Ronald Reagan's funeral on June 11, which took place during the employment survey period. Many businesses (including Wall Street) were closed on that day, reducing the amount of hours worked. This is a good explanation for the decline in hours worked, but it doesn't explain why the job gain was below expectations.

The fact is, a person is counted as employed as long as they worked a single hour during the survey week, which is the pay period that contains the 12th day of the month. Thus, even though some employees didn't work on June 11, if they worked at any other time during that week, they'd have been counted as employed. That said, some hiring that might've taken place on June 11 could have been delayed beyond the survey period. But that would represent just 1/20 of the number of business days for the month, making it unlikely that it had much impact on the monthly tally.

Fundamentals Are Still Solid

The depth of weakening in economic growth is likely to be limited because of solid fundamental underpinnings. These include the strong condition of the U.S. banking system; solid year-over-year income growth, now up close to 6%, or roughly $525 billion; strong growth in corporate profits, now up about $300 billion over the past five quarters to $1.2 trillion and above the level of capital spending, a rare condition that will encourage more business spending and hiring; still-low interest rates; growing household net worth, which is now at a record $44 trillion; strengthening global economic growth; and U.S. tax and regulation policy that encourages entrepreneurship and has enlivened the animal spirits in the economy.

Looking ahead, I'd focus heavily on the weekly data, such as chain-store sales. If the data show a reigniting of growth, then I'd consider short positions in Treasuries. If the strengthening doesn't happen by early August, I'd cover and reconsider establishing a long position leading up to the election. After that, the likelihood of solid holiday sales (owing to this year's job growth) makes for a good short opportunity on any fall rally in Treasuries.

As for equities, if the data show reignited growth -- where economic activity could be considered strong enough to boost profits, yet not so strong as to raise inflation pressures -- I'd expect a much better six months of performance ahead than the six just past.
Tony Crescenzi is the chief bond market strategist at Miller Tabak + Co., LLC, and advises many of the nation's top institutional investors on issues related to the bond market, the economy and other macro-related issues. At the request of the Federal Reserve, Crescenzi is a regular participant in the board's Livingston Survey of economic forecasters. He is also the author of The Strategic Bond Investor. At the time of publication, Crescenzi or Miller Tabak had no positions in the securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Crescenzi also is the founder of Bondtalk.com, a popular Web site covering the bond market and the economy. He appreciates your feedback and invites you to send it to tcrescenzi@thestreet.com.

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