The Bureau of Labor Statistics released December payroll data this week surprising those who pay attention to these things by reporting a decline of 17,000 non-farm jobs last month. I very seldom pay attention to payroll data for the same reason I don’t pay attention to Consumer Price Index data. Both contain so many fudge-factors that I don’t think they are useful indications of either employment or inflation.

In statistics you have to pay attention to the confidence level. Last month’s job data reported a loss of 17,000 jobs +/- 129,000. So the BLS reckons it could have been anywhere from a 146,000 loss to a 112,000 gain. Clearly not a number I think one should rely on too heavily. Also, keep in mind that employment is a lagging indicator of economic activity, not a coincident and definitely not a leading indicator. So why bother with it all? If you rely on labor data to figure out if you’re heading into a recession you’ll be half way through it before you even know it.

If we look at actual unemployment data as reported by BLS’ U.6 figures, which counts discouraged workers and those looking for full time employment but who, for economic reasons, can only find part time employment, then the unemployment rate went up from 8.3% in January 2007 to 9.0% last month (an increase in unemployment of 8.4%). This confirms in my mind that we are already in an economic recession.

The current economic climate comes as no surprise. I often wrote that when the real estate bubble bursts it would cause an economic slowdown in conjunction with rising bankruptcies. The common rebuttals were that real estate prices merely reflect a shortage of supply; that the economy will not slow down because it’s growing; and finally, that China and India’s economies are growing so fast nothing can derail a global economic boom.

Yet this week an IMF forecast said that America’s economic growth will slow sufficiently to cause a drag on worldwide economic activity, and that the belief that developing countries’ economies have are sufficiently powerful and have decoupled from the US is greatly exaggerated.

For many years I have found that the IMF has a more sober opinion about world economic affairs, and particularly US economic affairs, than US economic commentators.

MBIA, one of the bond insurers I discussed two weeks ago when I described how credit default swaps work and why you should pay really close attention to what happens in that market, announced they had lost $2.3 billion last quarter due to declining values of the securities they insured. As a result, MBIA could potentially face a credit downgrade from the credit rating agencies and that would result in a downgrade of the credit instruments that MBIA insures. Financial Guarantee Insurance Corp., which insures about $2.4 trillion of debt, was recently downgraded by Fitch. As the bond insurance companies get downgraded and the bonds they insure are downgraded we can expect the banks to come under more pressure to buy back the toxic waste they created and sold.

Merrill Lynch announced that it was forced to buy back collateralized debt obligations it had sold to the city of Springfield Massachusetts for $13.9 million (the same price it had sold these securities last year) for $1.2 million. Think about it: Merrill just took a 91.4% loss on collateralized debt obligations it had sold less than a year ago! This is serious stuff people. This may not have been a large nominal loss for a company the size of Merrill, but a 91.4% loss in one year on what is supposed to be a “safe” investment is serious.

Merrill Lynch was sued by the Massachusetts Secretary of State for fraud and misrepresentation one day after it bought back the toxic waste it had sold to Springfield. If the banks are now going to get sued for all the junk they had sold to investors there will really be nothing left of them. And what about the insurance companies and debt rating agencies, are they also going to get sued? This could get interesting. The Americans are going to need a lot of help to get through this one, and ironically they will probably be rescued by the very nations they like to strong arm.

So to make life a little easier for debt-ridden Americans the Federal Reserve cut interest rates another 50 basis points this week in an attempt to mitigate the damage. In the accompanying statement it said that downside risks to economic growth remain and that it would act as needed to address those risks. The problem is that I think we all know there is a serious problem in the credit market, which poses a serious risk to the economy, but I don’t think anyone knows how serious it is or how extensive the fallout will be.

Mortgage rates fell over the past month but I doubt that it will help the situation very much. Sales of new homes fell 41% year-over-year in December and sales for 2007 as a whole fell 26% from 2006 levels. The median price of a new home fell 10% year-over-year in December while the average price fell 12%. So even with slightly lower interest rates a home-owner (or should I say a house-borrower) that had a 95% loan to value mortgage could now have a 105% loan to value mortgage.

Problems in the credit markets are not restricted to real estate. The same techniques were used to upgrade the quality of corporate debt and consumer debt, and those shoes are yet to drop.