September payrolls fell 263,000, worse than expected and worse than August's (revised) 201,000 decline. The unemployment rate rose to 9.8% from 9.7%. The report signaled a painfully slow path to stabilization in the private employment market, and sharper declines in government jobs. It also suggested that the unemployment rate is likely to hit 10% by the turn of the year. The economy has now lost 7.2 million jobs since the recession began—but the story is even worse than that. The BLS now tells us that it expects to revise down March 2009 employment by 824,000, based on a full employment count from unemployment insurance statistics. That implies that the total loss is now 8.0 million.

Private employment fell 210,000 in September, worse than the 182,000 decline in August. It is not the first setback we've seen on the road to recovery (there was a much more severe setback in June), and the three-month moving average of private employment declines is still easing (it is now 213,000, after 273,000 in August). But the easing is gradual and we are not close to adding jobs. The leading indicators in the report were not promising. The workweek fell, and is now back at its June low. And temporary help jobs—while declining only fractionally—still have not moved into positive territory.

In the private services sector, job losses widened to 94,000 in September from 50,000 in August. The news worsened this month in retail (down 39,000 instead of down 9,000), transport and warehousing (down 15,000 instead of flat), and private education services (down 17,000 instead of up 4,000). Auto dealers lost 5,000 jobs after adding 4,000 in August, not a surprise as the surge in sales from "cash-for-clunkers" disappeared. Temporary help jobs fell 2,000, less than August's 7,000 decline, but still not yet in the plus column, which would be a leading indicator of broader gains elsewhere.

Manufacturing jobs declined less sharply than in August, down 51,000 instead of down 66,000. Employment in motor vehicles and parts fell 4,000, less than the 14,000 decline in August. Recent shifts in this sector have been heavily influenced by seasonal quirks. If we exclude motor vehicles and parts, then the manufacturing job loss was 47,000 in September, just slightly better than the 52,000 loss in August.

The manufacturing workweek dropped to 39.8 hours, from 39.9 in August. Overall manufacturing hours worked fell 0.5% for the second month in a row. The ISM report says that manufacturing output is rising—but the employment report is telling us is that it is not rising fast enough for firms to need to add more hours worked. Productivity increases are covering the output gains.

Construction payrolls fell by 64,000 in September, after a 60,000 loss in August. The construction employment figures are showing a contrast between the residential and nonresidential sectors. The losses in the residential sector were just 13,000 this month, but the nonresidential sector lost 39,000 jobs. This is consistent with the story that residential construction activity is bottoming out, but that nonresidential has much further to fall. There were 12,000 jobs lost in heavy and civil engineering construction, where one might hope to see the impact from fiscal stimulus coming through—but one cannot know how many jobs would have been lost without the stimulus.

The news on government jobs is getting worse. State and local governments have now shed 160,000 jobs over the past four months as budget cuts bite. This month, they lost 47,000 jobs, of which 29,000 came in education as the school year began. The education sector as a whole lost 46,000 jobs this month, if you add in the 17,000 jobs lost in the private sector. Private universities' endowments have taken a hit, and they have cut back their hiring as a result.

The unemployment rate rose to 9.8% from 9.7%, as the household survey showed a huge decline in employment (down 785,000) and a large but not so severe drop in the labor force (down 571,000). Note that the household survey is smaller than the payroll survey, so its employment numbers are more volatile from month to month.

The most comprehensive measure of underemployment (U-6)—which includes workers who would like a job but are not currently looking, plus those working part time who would rather work full time—rose from 16.8% to 17.0%.

Total hours worked in the private sector fell 0.5% this month, after a 0.2% decline in August. The news for consumer spending power was even worse than that, because average hourly earnings rose only 0.1%, after a 0.4% gain in August. It seems that the acceleration in earnings in July and August was probably related to the hike in the minimum wage.

Hours worked fell 3.0% overall in the third quarter compared with the second, much milder than the second quarter's 7.8% drop but still heading in the wrong direction. Since we expect that GDP will grow by 3%-plus in the third quarter, that implies another outsized gain in productivity after the 6.6% productivity surge in the second quarter.

This report contained nothing to support the view that the economy will be adding jobs before the end of the year. We see the economy beginning to add jobs in the second quarter of 2010—helped by government hiring for the Census—but that is dependent on the notion that the recent dramatic growth rates of productivity cannot be sustained. The unemployment rate is likely to hit 10% by the end of the year and peak above 10% in the first half of 2010. There was also nothing in the report to support the view that the consumer can sustain the spending increases that we saw in August—employment and hours worked were down, and hourly earnings only inched higher, implying that wage and salary incomes fell. A weak outlook for consumer spending remains the key reason to suppose that once we get beyond the inventory cycle, which will support growth in the second half of the year, the recovery will be a slow one.