The Labor Department will report employment data for March on Friday. This is a key indicator of the depth and duration of the recession, which began in December. If the payroll jobs decline for a third straight month, it will be hard to deny that the economy has entered a recession of unknown depth and duration.

Unlike past post-World War II recessions, the current meltdown is caused by a crisis of confidence among fixed income investors, such as insurance companies and pension funds, in the integrity and solvency of the major Wall Street banks. The rapid decline in the market value of mortgage-back bonds issued by these banks, and erosion in the balance sheets of the major banks caused by the declining value of unsold bonds on the books of these banks, represents a modern day run on the banks, which has required the Fed to loan the banks sums totaling about 4 percent of GDP.

Further job losses will indicate problems in the financial sector are damaging the real economy in lasting ways that will take many months, even years, to repair. The Administration, predictably, counsels calm, but oorpor in repairing damage caused by the shut down in bank access to the fixed income market to raise funds has caused credit to contract for sound businesses. Even as the Fed cuts interest rates and pumps up the balance sheets of banks, business loans contract and layoffs escalate throughout the economy.

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Further, structural problems, like the growing trade deficit with China and runaway price of oil, are further hampering prospects for employment growth. Unfortunately, the Administration's responses to these problems have been tepid and encourage pessimism among business in the economic outlook. Predictably these businesses cut hiring and layoff workers adding to the prospects of an employment death spiral.

In tomorrow's jobs report the key variables to watch are:

Jobs Creation.

March 7, the Labor Department reported the economy lost 63,000 payroll jobs in February, after losing 22,000 jobs in January. In addition, retail sales and industrial production have been falling, indicating the housing and credit crisis are causing a general contraction of economic activity. First quarter GDP growth will likely be negative.

If payroll jobs fell again in March that would be the strongest indicator yet that the economy has entered a long recession-one of unpredictable length and depth. The consensus forecast is that the economy lost 50,000 jobs in March. My published forecast is for a 35,000 decline.

Unemployment.

In February, unemployment fell to 4.8 percent, as statistically estimated by the Labor Department, even as the number of people holding jobs fell, because of revisions in measures of the adult populations, and labor force participation among adults.

Since President Bush took office, adult participation in the labor force has been declining owing to worsening labor market conditions. If labor force participation today was at the same level as when President Bush took the helm, the unemployment rate would now exceed 6.5 percent. The difference comes from the fact that the Labor Department does not count as "unemployed" those discouraged workers that have quit looking for work.

Private Sector Payrolls.

In February, government employment expanded by 38,000 even as overall payroll jobs contracted 63,000. This indicates the private business economy shed 101,000 jobs. It is difficult for the public sector to continuing expanding if the tax base-the private sector economy-is contracting. Further contraction in private sector employment in March indicates that job losses for the entire economy will accelerate as we move through 2008, and the economy may be headed for a death spiral.

Construction.

Historically, manufacturing and construction offer workers with only a high school education the best pay, benefits and opportunities for skill attainment and advancement. Troubles in these industries push ordinary workers into retailing, hospitality and other industries where pay often lags. These phenomena at are the heart of middle class and blue collar discontent that color the economic debate in the presidential primaries.

Manufacturing Employment.

In February, manufacturing lost 52,000 jobs, and over the last 91 months manufacturing has shed more than 3.6 million jobs.

The growing trade deficit with China and other Asian exporters is a key factor. If the trade deficit was cut in half, manufacturing would recoup at least 2 million of those jobs, U.S. growth would exceed 3.5 per cent a year, household savings performance would improve, and borrowing from foreigners and the federal budget deficit would decline.

The dollar remains too strong against the Chinese yuan, Japanese yen and other Asian currencies. The Chinese government artificially suppresses the value of the yuan to gain competitive advantage, and the yuan sets the pattern for other Asian currencies. These currencies are critical to reducing the non-oil U.S. trade deficit, and instigating a recovery in U.S. employment in manufacturing and technology-intensive services that compete in trade.

To affect this policy, China intervenes in currency markets, selling yuan for dollars and other western currencies at a discount from a market-determined price. In 2007, this intervention reached $461 billion or 44 per cent of China's exports. Ben Bernanke has correctly characterized these as an effective subsidy on exports.

Sadly, Treasury Secretary Henry Paulson, in a recent speech to the Economics Club of Chicago, expressed the view that the employment situation in manufacturing is healthy and characterized as "protectionist" substantive efforts to redress exchange rate problems with China, proposed by Administration critics in Congress. With such apathy from the Administration and contempt expressed by Paulson for those who differ with him on appropriate tactics, it is small wonder that blue collar workers and their unions question the efficacy of U.S. trade policy.

A crisis of confidence has emerged regarding the conduct of U.S. trade policy, and the Republican Administration and Democratic majority in Congress ignore it at peril of the nation.