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Is Employment Growth Slowing?

Today's bad employment number raises the odds:

OUCH! THE LABOR MARKET TAKES A HIT: Yesterday we said we were impressed by the labor market's ability to hold up relatively well against what some said was an approaching recession. What a difference a day makes! Today, we're far less impressed. In fact, we're surprised by the sharp downturn in job creation last month. Score one more for those who think the Fed will soon begin cutting interest rates.

Meanwhile, we can ponder the implications of September's meager rise of 51,000 in nonfarm payrolls. A lesser number on this front hasn't been seen since October 2005's 37,000 advance. Of course, one could write off the previous dip as the extraordinary fallout from Katrina, which temporarily threw the labor market off its stride in September and October of last year. Indeed, the slide was more than reversed in November 2005, when nonfarm payrolls soared by 354,000, followed by a string of lesser but still robust months of job creation.

Alas, that kind of rebound from last month's dip looks remote this time. With the real estate market cooling and a number of other economic metrics softening, job creation is now taking it on the chin.

The good news in today's employment report is that August's payrolls rose by 188,000, up significantly from the initial estimate of 128,000. Meanwhile, the national unemployment rate fell to 4.6% in September from August's 4.7%. There's also some technical number-crunching going on related to so-called benchmark revisions. Reportedly, the annual revision will be unusually large [+800,000], perhaps giving a new bullish aura to the past profile of job creation.

Hope springs eternal, even it's technical in nature. These days, the stock market bulls aren't picky about where they get their inspiration. Regardless, it's all about the future now, and the trend of slowdown increasingly looks baked in to the economic cake. The bond market will cheer, as it has been for months. Until and if some new report changes the perception, we think we know what we'll be getting for Christmas.

The key questions now: How can the stock market maintain its cheery outlook in the wake of this morning's news? Meanwhile, now that the slowdown is fact rather than speculation, will it produce what the Fed desperately needs: a commensurate slowdown in core inflation?