More than a month after Hurricane Katrina and two weeks after Rita hit the Gulf Coast, the official assessment of the economic damage still feels like a lot of hot air.

Case in point: the Labor Department's latest monthly employment survey. Only 35,000 payrolls were lost in September, according to the government data released Friday. That was way below the conservative forecasts of Wall Street economists, who on average expected payrolls to drop by 150,000.

The report also contained upward revisions to previous monthly numbers, adding a total 77,000 payrolls for July and August, lifting the monthly average to 194,000 over the past year.

As for the employment report's wage survey, it pointed to a rather tame picture. Average hourly wages rose by 3 cents, or 0.2%, to $16.18, in September, below expectations for a 0.4% gain.

The stock market, which had plunged over the past three sessions over concerns about inflation and growth, breathed a sigh of relief after the report's release. Gains, however, were capped as crude oil bounced from its recent slide and, perhaps, traders rethought the veracity of the surprisingly strong employment report. Crude oil was recently up 41 cents at $61.77 a barrel in Nymex trading.

After trading as high as 10,347.30 in its initial reaction to the jobs data, the Dow Jones Industrial Average was recently up 9.61 points, or 0.09%, at 10,296.71. The blue-chip average was lifted by the likes of Exxon Mobil ( XOM), Caterpillar ( CAT), IBM ( IBM) and Merck ( MRK).

Also down from its morning high, the S&P 500 was recently up 3.02 points, or 0.25%, to 1194.51. The Nasdaq Composite was up 6.30 points, or 0.30%, at 2090.38.

In reaction to the employment news, the price of the benchmark 10-year Treasury bond first fell, and its yield rose, on expectations that a still-strong job market is adding to inflationary pressures. But the trend reversed midmorning as the bond's yield approached 4.40%, an attractive level for many buyers. The price of the 10-year was recently up 4/32 while its yield dipped to 4.37%. Bonds also received so-called safe-haven bids after New York City partially closed off Penn Station Friday morning, a day after authorities alerted citizens to a possible attack on the city's subways.

Something's Amiss at the BLS

Beyond the reassuring headlines, there was little in the employment report that reflected the impact of the hurricanes.

"Finding who has a job and who doesn't in the Gulf region is not a simple task," notes Joel Naroff, president of Naroff Economic Advisors.

Many firms are still shut down, some have no phone lines, some have delayed letting go of their workers. Naroff notes the latest payroll report is full of inconsistencies, such as added workers in the oil extraction and health care industries, despite the closings of oil rigs and hospitals in the Gulf region. Likewise, education jobs rose even though many schools remained closed.

"How are these strange things possible?" Naroff wonders. His answer: "As long as people got paid, they were employed, even if they weren't working."

But this means that as basic infrastructure is restored, the hurricane-related job losses are about to get much worse in the months to come, the economist predicts.

The overall job picture remained strong before Katrina. But that's also being threatened by the surge in energy and commodity costs that has fueled inflation fears at the Federal Reserve and on Wall Street.

According to John Challenger, CEO of outplacement firm Challenger, Gray & Christmas, most of the post-hurricane impact on national jobs in the coming months will be from the rise in the cost of energy. "These price increases impact not only consumers' ability to spend, but they eat into employers' bottom-lines, making it harder to expand and increasing the likelihood of job cuts," Challenger wrote.

Indeed, the market's and consumers' concerns over inflation, as well as the Fed's, are unlikely to abate in the coming months. Inflation expectations often translate into higher prices as businesses start passing on higher costs.

"Fed officials will be watchful whether the apparent increase in inflation expectations translates into higher wage growth in coming months," says Goldman Sachs chief economist Bill Dudley.

All in all, the latest jobs report does little to abate recent market concerns of an aggressive Fed threatening an already weakening economy.
In keeping with TSC's editorial policy, Godt doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He appreciates your feedback; click here to send him an email.