The U.S. Dept. of Labor employment report for May was very disappointing. Stock futures dropped dramatically on the announcement, the market opened lower and sold off further into the afternoon. Is this a reasonable reaction?

Looking at the employment data, there are some worrisome details. Specifically, some early signs indicate that the employment trends of the past year may be weakening. One of the first indicators is shown in the following graph.

The year-over-year declines in total employment have been rapidly approaching zero in 2010. However, the Employment Situation Report released by the U.S. Dept. of Labor June 4 shows a possible change of trend when the temporary Census positions added this year are subtracted. These are positions that will largely disappear in the third quarter and be completely gone by year end. The red line represents the underlying trend in employment without these very short term positions.

This is a one-month change and does not confirm a trend change; it is merely an alert. The June and July reports will be needed to confirm (or disprove) a trend change.

The tracking chart last shown in my Feb. 5 article here at TheStreet is updated above.

To continue the trend of recent months into the third quarter, we would project monthly employment changes between 200,000 and 500,000 per month.

A more modest projection results when the graph uses data not including the temporary Census hires. The projection in that case, shown on the next page, is for third quarter employment growth to be in the range of 150,000 to 300,000 per month.

If the recovery is slowing, it should be accompanied by total employment job growth averaging less than 150,000 per month in the third quarter. If the average is greater than 250,000 to 300,000, the economic recovery could possibly be accelerating.

Another negative factor is the one-month reversal of the 2010 trend of increasing the civilian labor force. In May, about 40% of the gains of the prior four months were given back. See the following graph.

Another negative factor that must diminish is the length of unemployment, which has reached unprecedented levels in this recession. This is reflected by the extended continuing claims count which continues to remain above 5 million. These are the supplemental claims paid with Federal extended benefits not normally available to the unemployed. The problem is most dramatically shown by the number of unemployed for more than 27 weeks (see next page)

A final troubling area is the continuing high level (around 450,000) of new initial unemployment claims. This deserves further detailed analysis and will be addressed in a forthcoming article.

The outlook for the summer is quite uncertain. The state of the U.S. recovery is possibly wavering, struggling to keep balanced on its weakest leg, employment. The parameters to be followed in the next four months related to employment are:

1. Employment gains averaging 150,000 or better for the next four months (net of Census jobs).

2. Resumption of growth in the labor force. If the economy is not strengthening people will stop looking for work.

3. The very high number of unemployed for more than 27 weeks must peak and start down.

Absent the above developments, the recovery is in serious trouble. The term "jobless" recovery doesn't mean no job growth; it means slow job growth. With no job growth, there can be no "jobless" recovery. At the very best, job growth near zero produces stagnation; at the worst a serious double dip recession and employment losses resume.

Investors need to be especially cautious as the summer unfolds. Investing in indices using ETFs such as DIA, SPY and QQQQ does not seem to be very advisable. Traders may make money on short swings in volatile markets. Investors would be wise to wait for the air to clear.

Disclosure: Author is long several stocks in the S&P 500. Frequently trades leveraged ETFs, but no positions open at the present time.

John B. Lounsbury is a financial planner and investment adviser, providing comprehensive financial planning and investment advisory services to a select group of families on a fee-only basis. He worked for 34 years with IBM, and spent 25 years in R&D management and corporate staff positions. He also was a Series 6, 7, 63 licensed representative with a major insurance company brokerage for nine years.

Specific interests include political and economic history and investment strategy analysis. He holds degrees from the University of Vermont, Columbia University and the Illinois Institute of Technology, where he studied chemistry, physics and mathematics. He is a contributor to Seeking Alpha and his own blog, PiedmontHudson.

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