Two of the three primary labor market inputs (the number of people working and the length of the average workweek) have already turned lower, and I am now watching for possible confirmation from the third, average hourly earnings. With that “wage deflation concept” in mind, I will be paying extra attention to the worker compensation data (raising and planning to raise) included in Tuesday’s report from the National Federation Of Independent Business. Both measures (See Chart 1 and Chart 2) are currently at all-time lows, but there have been rumors of some improvement in some of the February NFIB employment indicators. The NFIB data on selling prices will also be watched for potential deflation implications, although wage deflation is much more troubling than goods/services price deflation.

The exceptionally weak February employment report sets the stage for Q1 hours worked possibly posting a larger decline than the -7.4% drop seen in Q4. That has prompted speculation that Q1-2009 GDP might also be weaker than Q4’s -6.2%. While possible, none of the employment indicators are used by the Commerce Department in its GDP calculations, and data that are direct GDP inputs currently point to Q1 consumer spending doing much better vs Q4’s -4.3%.

However, GDP and the markets are two very different issues, and I remain very comfortable with my bearish equity position, particularly as more and more economic indicators (of all types) move into record low territory (either outright or on a year-over-year basis).

As measured by the S&P 500, the pullback from the 2007 high has essentially matched the pullback seen between 2000 and 2002, despite the fact that the problems are much worse in this cycle than last. Net I continue to believe there is more downside potential in the S&P 500, particularly as the labor market continues to deteriorate.

At the heart of the current crisis are: 1) a reluctance of asset holders of all types to accept the fact that things are no longer worth what they once were, and 2) greed, corruption, and ineptitude at the highest levels of corporate America.

Until those two points are dealt with (there are strong self interests at work to avoid dealing with them, particularly with the latter), the self-correcting dynamics of the economy will be prevented from working.

Mark Serlin is the Chief Economist at Economic Strategies Inc. Prior to joining Economic Strategies, Mr. Serlin authored the widely distributed SERLINON economic indicator analysis service for Bridge Information Services. Mr. Serlin has also worked in the research departments of Bear Stearns, Ried Thunberg, and Manufacturers Hanover.