INDICATOR: August Employment Report

KEY DATA: Nonfarm Payrolls: 96,000; Private Sector: 103,000; Unemployment Rate: 8.1 percent (Down 0.2 percentage point)

IN A NUTSHELL: “Reports of the labor market rebound were premature.”

WHAT IT MEANS: With the conventions behind us, it is clear that the politics of the economic data will be boiling over. Nothing is more political than the employment report.

The August jobs numbers have a little something for everyone. For economists, it’s all about employment, and the increase was disappointing, especially given the upbeat unemployment claims numbers and the strong ADP estimates.

Large declines in manufacturing were one reason the gains were modest. However, much of the cutback was in vehicles and related industries, and the odd assembly plant shut-down pattern in July led to a large increase that month but payback in August.

The other problem area is state and local government, which cut another 10,000 workers. Over the past year, total government payrolls are down 166,000.

As for the unemployment rate, it is always good to see it decline. Of course, it would be better that the drop occurred as a result of more people working and looking for work, which was not the case in August. Does this mean people are becoming more frustrated with the job situation? That is hardly clear.

How much of the fall in the labor force is due to baby boomers leaving the market or people who were on extended unemployment benefits being terminated is something that needs to be determined.

The infamous U-6 rate, which includes anyone who isn’t employed full time as well as those marginally attached to the labor market, fell from 15 percent to 14.7 percent.

Regardless, a declining labor force is not the sign of an improving economy.

MARKETS AND FED POLICY IMPLICATIONS: When I am wrong, I admit it. I was way off on the jobs gain number. Even the more cautious economists had a significantly higher estimate than what we got, though that hardly eases the pain.

This disappointing report is not likely to be received well either by investors or the Federal Reserve. So, will the Federal Open Market Committee announce a new round of quantitative easing (QE) at next week’s meeting? I still don’t think conditions are so bad that QE3 is called for.

However, look for the FOMC to signal that any further deterioration in conditions will result in action taken. That will give the Fed room to see if the August number was affected by some seasonal issues or that the decent July job rise, which was revised downward, was the aberration.