Friday’s weak employment report confirmed what the ADP and Challenger data earlier in the week had already shown.  August payrolls fell for the first time in four years, with subsequent monthly revisions also weaker.  Most had still expected moderating gains in the numbers, but not job losses.  The data supports the view that the job weakness is spreading beyond just the housing and financial sectors, where logic would have it, and into other areas like manufacturing, hotels, transportion and publishing.  While unemployment overall remains low by historical standards, the data suggests a clear inflection point.

Lower job numbers and lower inflation significantly raises the prospect for a Fed easing next week.  The markets sold off on Friday and are continuing their weakness today as well, as some speculate that the Fed is late and that a recession may be at hand.  We still believe in a soft landing scenario for the economy as a whole, but do expect the recession in housing and some areas of the financial sector to continue for quite some time, perhaps even years.  And investors should also keep in mind that although a Fed cut could stimulate stocks move to the upside following an announcement, it often takes a long time before their impact is felt in the economy at large. 

Staying invested in companies whose growth is less tied to the domestic economy at large will likely be the key to success as we close out the year and look forward to 2008.