The news item that kicked investors into a panic last week was an employment report out of Washington D.C. that just has to be considered recessionary. There's no two ways about it.

The reported gain of 18,000 jobs was very narrowly distributed, with key sectors of the economy posting big losses. Private sector employment was down 13,000 jobs, and goods providers were down 75,000. Most of that was in residential and commercial construction. Manufacturing jobs were also down 31,000, and retailers were down 24,000, seasonally adjusted. The only positive sectors were health care, up 28,000, and bars and restaurants, up 27,000.

One of the best independent economic analysts that I know, Phillipa Dunne, quipped that the new U.S. economic model appears to be very simple: Eat, drink and check into a hospital.

We need to note that job growth sank materially in the second half of the year. Payroll gains in the first half were up 134,000 per month. In the second half, they were up only 87,000 per month. The yearly growth rate has fallen to 1.0%, which is the worst since early 2004.

The only good news out of all this is that a declining employment rate tends to push down expectations for inflation. Makes sense, right? Joblessness tends to put a damper on employees' demand for higher wages and bonuses. If the lack of pressure on wages helps to offset the rise in raw materials costs, it gives the Federal Reserve more room to cut rates more quickly over the next six to twelve months. I do think that they will get down to 3% for the Federal Funds rates by the end of the year, which would bring down the rates that individuals and companies pay to levels that could finally spark more buying. Rates that low would also bring long-term fixed mortgages under the 6% level, which has historically been the point at which houses become affordable to more people without all the fancy teaser rates and tricks used in the mid-2000s.

Finally, I just want to point out the fact that the unemployment rate jumped from 4.7% to 5% in a single month was very curious. That is a huge jump, and the cynical side of me says that it was more manipulated than ever. The cynical view says that the government wants to make the economy in the first half the year look as bad as possible so that they can make it look stronger later in the year during the election season and take credit for it -- helping the Republican candidate win. My many years of covering politics for newspapers has led me to believe that you can never be too paranoid about the motives of politicians and appointed bureaucrats' motives when they are facing the possibility of being swept out of office, so don't count out the possibility that we're being set up for a reversal.