The Economist predicts a positive feedback loop

How fun!

There are some reasons to believe that this report exaggerates the bad news. Government jobs, for instance, fell for the third month in a row. That is extremely unusual and may well be made up in September’s figures. It is not unheard of for monthly payrolls to fall for a month, and then rebound. But the basic message—that America’s labour market was weakening well before the recent financial turmoil—is hard to deny. (The payroll figures are based on surveys conducted in the middle of each month. Thus August’s figures do not reflect the full brunt of the past few weeks’ credit crunch).

For months, solid job growth, rising incomes and low unemployment have been the foundation for an optimistic assessment of the economy’s prospects. With jobs plentiful, the argument went, even a sharp housing bust need not derail the broader economy. That foundation may now be crumbling. There is little doubt that the housing market was worsening, once again, before the August turmoil. The pace of new home construction plunged in July, while the stock of unsold homes rose to a 16-year high. Now it seems that the labour market was weakening too. A weaker labour market, in turn, is likely to worsen the housing bust as more people find it hard to pay their mortgages. Pile a sharp tightening in credit conditions on top and recession seems all too plausible.

That spectre is why it is all but certain that the Federal Reserve will cut the federal funds rate, its benchmark short-term interest rate, on September 18th. The speculation now is whether the cut will be a modest quarter-point, bringing the funds rate down to 5%, or a more aggressive half percentage point cut. Unfortunately, if the employment figures are a harbinger of what is to come, it may already be too late to stave off a nasty slowdown.

Where does this leave us? I would say that we certainly need to temper our expectations. On the other hand, emerging markets are seemingly impervious of late to any adjustments in the Western markets: the "Third World" consumer may just bail us out. Additionally, the past few years have seen the resurgence of a bifurcated American economy, where the rich function on a different level from the rest of the country. The decline in the real estate market, while troubling, will not affect the balance sheets of the wealthy in the same way they will the poor. Given that this demographic accounts for the vast majority of consumption in the US, talk of recession seems a little premature.

Themes to watch for:

• Financial underperformance: obviously.
• Reduced but consistent growth, barring tax hikes.
• A shift towards populism: politicians that can co-opt the anger of the displaced poorer classes are a "strong buy". Expect Clinton to change her message over the coming months.
• Continued worry over global warming, global terrorism and sky-rocketing resource prices.

Cheers!

Listening to: Aesop Rock - None Shall Pass