The labor market continues to weaken, reflecting the intense economic slowdown of late 2008. Consumption plummeted in late 2008, and now businesses are working furiously to cut inventories even as consumption seems to be leveling off. In order to cut inventories, firms have to slash production, and that means substantial layoffs. Look for more large payrolls losses in the next few months. However, we expect inventories to hit targeted levels by mid-year, leading to both higher production and fewer job losses later this year as well as eventual job gains in 2010. One oddity in today’s report is that the labor force (people working or looking for work) increased 498,000 in February. Without this unusual increase, the unemployment rate would have increased to 7.8% rather than 8.1%. One relatively bright spot in the report was that average hourly earnings (the cash earnings of production workers) increased 0.2% and are up 3.6% versus last year. In addition, the civilian employment measure of jobs (adjusted for the payroll concept) declined only 175,000 in February and is down much less over the past year than payrolls. This signals that the worst payroll job losses of the recession are almost over.