Don't Expect Fireworks From Labor Reports (slackening demand fuels further layoffs)

http://www.thestreet.com/s/dont-expect-fireworks-from-labor-reports/newsanalysis/investing/10423585.html?puc=googlen&cm_ven=GOOGLEN&cm_cat=FREE&cm_ite=NA

06/30/08 - 06:59 AM EDT

(Author's note: Richard Posluszny contributed to this article).

As investors prepare to take a break for the holidays, they may have to digest another set of concerning items about the job market. Challenger Gray & Christmas will weigh in with its monthly layoffs report on Wednesday, followed up by the monthly read on unemployment rates a day later.

There's little cause for hope on either front.

To be sure, last month's big jump in the unemployment rate to 5.5% was partially attributed to quirks in monthly data. As a result, it is very possible that the indicator may tick back down a bit. In fact, consensus estimates imply a slight improvement to 5.4%. Yet that would not infer that the labor picture is improving. The less-volatile three-month moving average should show another increase.

If we are to avoid a more serious economic slowdown, the consumer will need to hang in there. Any further pullbacks in consumer spending could trigger a vicious cycle whereby slackening demand fuels further layoffs.

That is why it is imperative that the pace of layoffs begins to slow. If companies keep shedding employees and if unemployment moves up the 7% to 8% range, as has been in the case in past downturns, then it will be virtually impossible to avoid a recession. If there is a sliver lining to this possible scenario, it is that inflation pressures would recede as demand -- and bottlenecks -- slacken.

To get a pulse of underlying labor trends, we had a chance to check in with John Challenger, head of CGC. His firm has been tracking layoffs for more than 40 years, and it has a clear sense of how the current weak employment environment compares with past slowdowns.

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