Employment situation: a mixed - or misleading -- picture
Nonfarm payroll employment fell 43,000 in September, posting its first drop since last April. While the September decline was unexpected, an upward revision to August payrolls left the overall level of nonfarm payroll employment in line with forecasts. As usual, the bulk of the declines were concentrated in goods-producing industries (mainly manufacturing). On the service side, transportation and retail trade payrolls also posted declines and led to a 5,000 drop in service-sector employment. Service-producing payrolls last declined in February.

Although nonfarm payrolls declined in September, the average workweek increased 0.6 percent during the month. This boosted the aggregate hours index for the second straight month. While the trend is only mildly positive, it is moving in the right direction.

The civilian unemployment rate edged down to 5.6 percent in September from a level of 5.7 percent in August. This brought the jobless rate to its lowest level in seven months. A change of only 0.1-percentage point is not considered a statistically significant by the Labor Department. Nevertheless, the downward trend should be a positive factor in our economy. Economists were expecting September's jobless rate to rise, not fall.

Many economists said the unemployment rate looks incredulous because household employment rose by more than a whopping 1.1 million persons in August and September! The Labor Department said a sizable improvement came from the 16 - 19 year old group, but conceded the increase is likely a problem with seasonal adjustment. When teens return to school, August and September are skewed. By that same token, then, one ought to discount the increases in unemployment in June and July when teens were entering the labor market.

Perhaps it is unlikely that the jobless rate should be declining right now. After all, neither weekly new jobless claims nor continuing claims are showing signs of improvement. But studies have shown that the unemployment rate figures are a more reliable indicator of labor market conditions than nonfarm payroll employment during economic recoveries. Often, after a couple of years, the revisions will show a stronger nonfarm payroll picture than the initial report, putting it more in tune with the jobless rate data (which doesn't get revised except for slight seasonal changes once a year).

Many economists - and bond market players - appeared disappointed with the downward trend in the jobless rate because it suggests that the Fed won't be inclined to cut rates when it next meets in November. But if the unemployment rate figures are indeed "incredulous", then the economists and policymakers at the Fed will throw them out and cut rates anyway! After all, a good number of Fed district presidents and governors are economists who monitor and parse the economic tea leaves quite closely.

Manufacturing: more good than bad news
The ISM manufacturing index fell back to 49.5 in September from the July and August level of 50.5. Any level below 50 percent suggests that the manufacturing sector is contracting. Not all components of the ISM index were negative. For instance, new orders and production remained above the 50 percent mark and suggest positive activity during the month of September. Supplier deliveries were also positive. The weakest link in the index stems from employment, which fell back to 44.9 in September from 45.8 in August. The payroll employment data confirmed that factory payrolls are still declining. This is one of those cases where the headline number is more negative than the component parts.

Factory orders were unchanged in August after jumping 4.4 percent in July. Civilian aircraft orders contributed strongly to both months, helping to boost the total level of new orders. Key sectors such as construction materials, information technology, computer and related products and motor vehicles and parts all posted declines in August. Nevertheless, nondefense capital goods orders (with and without aircraft) managed to record gains in July and August. We are finally seeing yearly gains in total orders as well as nondefense capital goods orders. This bodes well for production. Given that the ISM new orders index increased in September, it is possible that factory orders will rise next month as well.

Construction spending anemic
Construction expenditures edged down 0.4 percent in August after posting a 0.1 percent drop in July. Nonresidential construction spending remains a major drag on growth as it has for many months. Not surprisingly but still disturbing are the recent declines in residential construction spending. In fact, slight increases were recorded for single-family construction expenditures in July (but not August). The drag stems mainly from a reduction in remodeling expenditures which fell 2.5 percent in July and 0.4 percent in August. Notice the slight downward trend in residential spending on a year-over-year basis (although keep in mind it is still positive). It appears that nonresidential spending may be on the mend, on a yearly basis, but spending was still 18.5 percent lower than a year ago in August.

Clearly, recent trends show that residential and nonresidential construction is countercyclical; that is, nonresidential spending declines when residential spending is up, and vice versa. Many analysts worry that the time will come with housing activity begins to wane. That may not be a negative for the economy if the nonresidential sector begins its recovery.

Is the consumer love affair with cars and SUVs getting dull?
Motor vehicle sales fell sharply in September. Domestic cars were sold at a 5.5 million-unit rate while light trucks were sold at a 7.4 million-unit rate. The September selling pace was 2.5 million unit rates lower than in August. Incentives were still in place but were not as lucrative for consumers as they had been earlier in the year. Not surprisingly, automakers have once again re-introduced a new round of 0% financing options on new 2003 model year cars and light trucks.

It will be interesting to see whether consumers respond to these incentives. Hasn't everyone who wanted a new car or truck already bought one over the past year? Certainly, the financing arms of major automakers will find that their profit margins are reduced given the 0% financing incentive. Nevertheless, automakers might be able to make up the difference on the price of the car. Consumers might not be as sensitive to sticker prices if they know they won't pay any interest over the 5-year contract.

If motor vehicle sales don't pick up in October, even with the incentives, economists and policymakers will worry that consumer confidence and spending has totally collapsed. There is no doubt that Fed officials will be closely monitoring these figures.