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Will the Smokestack Slump Spread?

Nonfarm payrolls increased 135,000 in February, while the unemployment rate held at 4.2%. The workweek fell to 34.2 hours from January's 34.3 hours, while hourly earnings rose a stronger than expected 0.5%, which left earnings on a non-seasonally adjusted basis rising at a 4.2% rate.

Overall, the figures support S&P's belief that much of the January surge (revised to +224,000 from +268,000) was simply an offset for the weather-distorted weakness seen in November and December. Instead, these figures appear to be a fairly "clean" read of underlying trends, as they continue to show that the bulk of the weakness in job growth continues to be centered in a few specific industries -- namely in manufacturing and related wholesale sectors, as well as temporary help services.

The manufacturing sector lost another 94,000 jobs, with losses across a broad range of industries. Jobs in wholesale trade dropped 3,000, while help service jobs were little changed following a decline over the prior four months that has totaled a whopping 181,000.

The key question going forward is whether the broader economy can remain immune from the extreme weakness in manufacturing and help services.

Since September, these two industries have shed a whopping 454,000 jobs, and have hence clipped an average of 91,000 per month from overall reported nonfarm payroll growth. Moreover, job losses in manufacturing were widespread in February, with the manufacturing employment diffusion index falling to 28.1% - its weakest reading since 1990. This is in sharp contrast to the aggregate of the remaining industries, which over the same period have posted a solid average monthly gain of 194,000.

Looking ahead, there is risk that we will see a more broadbased slowdown in job growth. The moderating trend in hours worked and the sharp pick-up in announced layoffs suggests that hiring trends over the next few months could fall well short of normal seasonal patterns, as February through June historically is the strongest hiring period of the year. From Standard & Poor's Global Markets

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