Sometimes, All Jobs Reports Are Local

From the Wall Street Journal | Oct 7, 2010

To tune out noise in the jobs report, investors tend to ignore the headline figure and home in on private-sector employment signals. But doing so overlooks a growing risk for the U.S. economy: job-letting by state and local governments.

On Friday, the Labor Department releases its much-anticipated September jobs report. Economists expect a loss of 10,000 jobs after a drop of 54,000 in August, while the unemployment rate is expected to tick up to 9.7%.

And, as in previous months, the headline figure will be somewhat distorted by the federal government's hiring and then shedding of temporary census workers. Data suggest some 77,000 census workers were let go in September, for example.

So those looking for a cleaner read of labor-market trends are likely to stick with private-sector gains or losses. And while that is a critical gauge, it isn't the whole story.

State and local governments have been cutting jobs all year. So far, losses haven't been drastic—the sector has shed about 135,000 jobs since January. But there is more to come. Since downturns typically hit government budgets with a lag, they avoided the heavy job losses that hit the private sector during the recession itself. Federal stimulus funds also helped to forestall layoffs. And those are now running out.

Budget shortfalls for 2011 and 2012 are likely to reach $260 billion, which could translate to losses of roughly 900,000 jobs, according to the Center on Budget and Policy Priorities. That clearly poses a challenge to policy makers' efforts to reflate the U.S. economy as the stark reality of retrenchment actually hits consumer pockets.

An employer, right, looks over the resume of an unemployed Coloradan at a career fair in September.

The question is whether private-sector job creation is strong enough to offset such losses. Wednesday's report from payroll giant ADP, which showed a loss of 39,000 private jobs last month—the first decline in nine months—suggests not. If Friday's report confirms the weakening trend, it is likely to prod the Federal Reserve toward more aggressive action to stimulate the economy.

It also points to the limits of the Fed's approach. Its looser monetary policy is hardly as effective when fiscal conditions are tightening.

Investors can't afford to ignore the ticking time bomb of state and local payrolls.

—Email: tape@wsj.com

Write to Kelly Evans at kelly.evans@wsj.com