One Way to Tell the Direction of the Economy

A key variable in the success of the economy will be the labor market going forward. As business slows, companies will cut production and send workers home. This will translate into lost wages and a decline in consumer spending that will ultimately impact the economy negatively.

In the U.S., the labor market has been soft, as indicated by the monthly non-farm payroll data and rise in unemployment claims. In September, planned layoffs at U.S. companies are estimated to increase 7.2% in September on a sequential basis and to up a whopping 33% year-over-year, according to a report by employment consulting firm Challenger, Gray & Christmas Inc. This news is not good for the labor market, and it could translate into lower consumer confidence and economic growth.

But the labor issues are not limited to the U.S.; there is also labor weakness in the European Union (EU). The unemployment rate jumped to 7.5% in August in the 15-country EU, according to the EU statistics agency. Again, the impact on EU economic growth will be felt.

In the U.S., all eyes will be on the September employment report this Friday, which is expected to show a loss of another 90,000 jobs and the unemployment rate at 6.1%. The financial services sector is issuing pink slips at a rapid clip, and this will only pick up as more financial companies struggle with the credit issues and need to cut back expenses to survive.

My feeling is that the labor strife has not been considered seriously in light of the recent oil and financial worries, but needs to be addressed because of its potential impact on global economic growth. Keep an eye on the labor markets, as they will give you an idea of the direction of the economy.