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In August, we saw a better-than-expected figure as non-farm employment declined by only 216K, an improvement over July’s -276K reading. After seeing some notable improvements in the manufacturing sector in the last couple of months, many speculate that fewer jobs were cut this September. The consensus is a 186K decrease in payrolls, which would bring the jobless rate to 9.8%. Although this would mark the 21st month in consecutive payroll declines, it would also mean the fewest job losses since July 2008… certainly a considerable improvement over January’s eye-popping 741K drop in payrolls.

Even as the US shed 6.9 million jobs since the start of the recession, analysts are confident that the monthly trend in non-farm payrolls is moving in the right direction. Weekly claims have slowed significantly, from an average of 650K in June to less than 550K in the recent weeks. Every decrease in the number of job losses brings in “a new hope” for recovery…

The most recent NFP headline figure suggests that the US labor market is on its way to “recovery”. However, I am not going to get fooled by the government’s Jedi headline tricks so I decided to dig deeper. Guess what? I found out that the underlying numbers reveal otherwise. Let me break it down so it doesn’t sound all Wookie to you.

Figures for July indicated that about 422K people left the labor market. Some people got discouraged to look for a job and simply stopped searching. If this were taken into account, the jobless rate for August could have been much higher than the 9.7% toll.

Moreover, the underemployment rate – the broadest measure of unemployment – rose from 16.3% to 16.8% during the same period! The underemployment rate adds in the number of discouraged workers to the part-timers who prefer a full-time position. It is expected that these numbers will continue to rise in the coming months…

Let’s try to put this all together… Let’s say that those people who were too discouraged to look for jobs now want to enter labor market again… Add them to the people already looking for jobs… Toss in the underemployed… and finally, include those who will look for jobs for the first time… What do you get? A Jabba-sized amount of people seeking some sort of stable income!

A bit gloomy? Perhaps. But I’m just stating facts like C3PO…

We’ll get another look at this issue when the report is released on Friday. Now, if you’re like me, you might be wondering how the markets will react to the report… More specifically, what does it mean for the dollar? What will happen the day after that? What about next week and beyond? Ahhh, good questions my young padawan!

Clues on what would happen could be found by looking the prior releases. August’s release came out with a surprising upside figure, causing the dollar to gain a huge amount of ground versus most major currencies. The same happened in early September when the NFP came out with better-than-expected figures.

There is one major difference to take note of, however. After the release, the dollar rally in September proved to be unsustainable and the move eventually fizzled out. At the end of the day, the dollar actually ended up negative against most major currencies. Perhaps we might see the same reaction on Friday – a strong move in one direction then quickly fading and reversing.

On a broader time frame, let’s look at both sides of the force… If we continue to see worsening labor conditions, the investors could snap back into a risk aversion mode. And we all know what this could mean… the “return of the dollar”?

What if things improve? What if people buy into the “improvements” in the headline figures? I think we may get a clue from the immediate market reaction. If, as I’ve said above, the NFP report shows a better than expected figure, we might see more dollar-selling as investors jump on the risk appetite pod racer.

Then again, there seems to be a lot of concern with the stability of the dollar lately. It has been getting sideswiped by comments on diversification and whether the US government can handle its debt problems, etc. Perhaps, even without labor markets improving, the dollar index may continue to sink to lower lows.

Phew, I think I have gone on long enough. Anyway, be ready for some fireworks from all the light saber action that could ensue before and after the report. May the force be with you (and me)!