Jobs: Brace for more weakness

NEW YORK (CNNMoney.com) -- The big and unexpected job loss in August shook economists and investors, and while the September report due Friday is expected to show a hiring rebound, job seekers should still be nervous.

The Labor Department on Friday will release its closely watched jobs report, the first such reading since the August report showed the first drop in workers on U.S. payrolls in four years.

Economists expect a rebound in payrolls in Friday's September jobs report, but even that may not mean a healthy labor market.

That job loss set off alarm bells and helped open the door for the Federal Reserve to make its first interest rate cut in four years at its September meeting. Economists and investors will be watching Friday's report closely to see what it means for future Fed action.

The job report is important beyond the Fed and interest rates.

Stuart Hoffman, chief economist with PNC Financial Services Group, said that if the September jobs report is again much weaker than expected, especially if it shows another drop in employment, it will be very bad news for the economy.

"I think the chance of a recession is less than a third," Hoffman said. "If we see another drop in employment, especially in the private sector, I'd be surprised if not shocked, and very nervous. I might put the chance of a recession at 50-50. We might be hanging by our fingernails in that case."

Economists surveyed by Briefing.com are forecasting a 100,000 gain in payrolls in September. That's close to their forecast of a month ago that proved to be so wrong.

Even with that gain, the unemployment rate is expected to climb to 4.7 percent from 4.6 percent in August.

It's also possible that the August payroll reading of a loss of 4,000 jobs overall could be revised back into positive territory. August typically is a month that sees some of the largest revisions in the initial readings, said David Wyss, chief economist for Standard & Poor's.

But Wyss and many other economists say they're expecting job growth to be sluggish all the way into next spring or summer. That could mean unemployment rising later this year or early next year past the 5 percent benchmark for the first time since 2005.

"You need about a payroll gain of about 125,000 to 150,000 a month to keep the unemployment rate stable," said Wyss. "That's my feeling, that we'll see the unemployment rate gradually drifting up to above 5 percent, probably peaking out next spring or early summer."

Wyss is looking for a 100,000 payroll gain for September. Mark Vitner, senior economist with Wachovia, is forecasting about the same thing - a 98,000 gain. But he said that is due to a bounce back from the weak August number. Going forward he's only looking at an average gain of 85,000 a month, or about half the average gain seen over the last four years.

"We're definitely going to see slower job growth," he said. "Most will be related to residential construction, although one thing that is giving me concern is a number of businesses postponing projects originally planned for this year into the first quarter of '08."

In the August jobs report, the private sector actually posted a payroll gain, while lower estimates for government payrolls caused the decrease. But going forward, it's the subprime mortgage sector that is getting a lot of the blame for the softer employment outlook.

Homebuilders have slammed the breaks on new construction in the face of the weakest sales of new homes in seven years and a glut of product already on the market driving down prices.

Housing starts and permits have hit a 12-year low as builders cut back staff. Lennar (Charts, Fortune 500), the nation's largest builder by revenue, announced this month it has already cut its staff by more than a third and was looking at further cuts in the fourth quarter in an attempt to limit losses. And those cuts are primarily sales people and support staff, and doesn't count the decrease in workers on the company's construction sites, who are generally employed by subcontractors.

Major mortgage lenders are also cutting staff as several major firms go bankrupt or pull out of the part of the business that had been busy making subprime loans to those without strong credit ratings. Outplacement firm Challenger Gray and Christmas, which tracks layoff announcements, said those announced cuts by subprime lenders alone hit 20,959 in September.

While that's well off the 30,892 layoffs in that sector announced in August during the worst of the mortgage meltdown, it's above the nearly 18,000 cuts announced the first seven months of this year, or the nearly 13,000 cuts in the sector in all of 2006. Wyss said he doubts the staff cuts in that sector have ended. Morgan Stanley (Charts, Fortune 500) has already gotten the cuts started in October as it announced it would eliminate 600 jobs in its subprime unit.

It's not just building and subprime lenders cutting back, though. Wyss said manufacturing employment is also weakening and could see further cuts, especially as auto sales start to slump.

"Autos is a big part of it, but it's broader than that. It's all the way through manufacturing, both durables and non-durable goods," said Wyss. "Things like apparel and textiles are going down like you wouldn't believe. It's a combination of imports plus productivity gains."

The two day strike at General Motors (Charts, Fortune 500) this month came too late and was too short to affect the September jobs number. But even if the United Auto Workers union reaches deals at Ford Motor (Charts, Fortune 500) and Chrysler without strikes there, employment at automakers and parts suppliers could be affected by lower production going forward.

And major retailers may be cautious about adding as many jobs as normal for the holiday shopping season if they're concerned that consumer spending is starting to slow. The National Retail Federation estimates that total holiday sales this year will grow 4 percent, but that's weaker than the 4.6 percent increase posted in 2006. Already Target (Charts, Fortune 500), the nation's No. 2 discount retailer, cut its forecast for September sales.

PNC's Hoffman said his firm's survey shows small- and mid-size business owners have maintained a surprising positive outlook for sales and profits going forward, with most still unaffected by the subprime mortgage woes. But he said most have slightly scaled back their hiring plans from earlier this year.

"I think our survey is consistent with small gains in employment going forward," he said.

Hoffman pointed out those smaller employers are proving the support needed by the labor market.

"Whatever hiring that is going on is at small and mid-size businesses," he said.