August Employment Report

The August employment report showed that nonfarm payrolls CONTRACTED by 4,000 jobs against a consensus forecast of a 110,000 increase. This was the first drop in jobs in four years. Compounding the negative sentiment there were steep downward revisions to reports from June and July. That the unemployment rate, which is separately based on the household survey, was unchanged was the only spare, silver lining in the report.

Equity indices are off nearly two percent at the close with 10 year bonds up nearly half a point. All things being equal the equity indices held up reasonably possibly due to the fact that the bearishness of the data has made a 25 basis point cut in the fed funds rate on September 18th a foregone conclusion. The real speculation now is wehter the Fed will come through with 50 basis points (one-half of one percent).

The FOMC is in an unenviable position as 'only' a 25 bp cut now would probably cause a significant selloff and Capitol Hill will squarely blame the Fed for not doing enough to help the economy. Data on economic activity will be scrutinized closely over the next week.

The Fed needs to act and appear to act decisively. The key to this market crisis is that it is hitting at the root of economic activity which is housing. The planning, construction, sale and furnishing of new homes are a principal engine of the economy. The nearly frozen mortgage markets are starving what had already been a fluttering engine. It will take a lot of revive the mortgage markets and it is likely that the egregious lending practices that fueled the subprime sickness will be gone for good but confidence along with the provision of liquidity is critical and the Fed needs to cut AND sound dovish.