Friday’s awful payroll report doesn’t signal the start of a recession, but it does confirm that the job market has yet to heal. As a result, economic growth is unlikely to accelerate from last quarter’s anemic 1.7% rate. This has two implications for investors:

  • First, the odds of further quantitative easing go up, which is the main reason gold has been so strong lately.
  • Second, investor perception of risk is likely to start to shift.

The Labor Department reported on Friday that the US created only 96,000 net new jobs in August, about two-thirds of the expected amount and a significant deceleration from previous months. In 2012, job growth has averaged 139,000 per month, compared with 153,000 in 2011.

While the unemployment rate dropped to 8.1% in August, the lower rate can be attributed to a significant drop in the number of people tied to the labor force. This drop in the number of potential workers can also be seen in the participation rate, which fell to a 31-year low in August.

More troubling, average compensation actually fell in August, making it one of the worst months on record. Hourly earnings for nonfarm private sector employees edged down by one cent to $23.52 overall and $19.75 for production and nonsupervisory staff. US pay is barely keeping up with inflation; over the past 12 months, average hourly earnings rose by only 1.7%

The view that growth is likely to remain lackluster is supported by other data. For example, the contraction in manufacturing has been accelerating for three months in a row. Even more troubling, most of the forward-looking components of these statistics, like new orders, suggest the economy is unlikely to pick up in the near term. For example, the August ISM New Orders figure fell from 60.1 in May to 47.1 in August, the lowest level since April of 2009.

What does this mean? It is more likely the Federal Reserve will move forward with further quantitative easing this week when they meet on Thursday. While it is not certain they will act – and even less clear that any action that attempts to lower interest rates, the Fed’s main lever for promoting growth, will have a significant impact on the economy given that rates are already extremely low – the chances of a QE3 are higher now.

All of this may be changing investors’ perceptions of where the greatest risks lie. Followed by the recent stabilization in Europe, it is now possible that the greatest risk may no longer be foreign, but has instead become domestic: a weakening US economy facing the fiscal cliff.

Russ Koesterich, CFA, is the iShares Global Chief Investment Strategist.

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