There probably aren’t enough appropriate adjectives to describe the employment report that showed the economy shed another 524,000 jobs in December, a total of almost 2.6 million in all of 2008. But that dismal jobs number paled against the sharp falloff in the number of people working (a separate measure): down 806,000 in December and almost three million in the last year, conveniently equal to the job-creation goal established by President-elect Obama.

Employment reports are usually thought of as lagging indicators of the economy, reflecting decisions made in response to a slump. Friday’s report, though, was as much of a leading as lagging indicator, pointing as it does to weak retail sales (to be reported Wednesday) and slow growth in prices -- if not an outright decline -- in Friday’s consumer price index report.

The forward-looking data come in the numbers behind the numbers in the employment report. Within the employment report, we learned average hourly earnings increased, but the number of hours worked declined. Doing the arithmetic we discover weekly earnings declined 0.3% from November to December and in the last year, weekly earnings have increased just 2.0%, the weakest year-over-year growth since 2004, leaving consumers with less to spend.

While falling oil prices have pulled prices of other items down -- not only petroleum-based but those for which shipping costs are a significant price component -- prices were also driven down by weaker demand, or “demand destruction,” which is a function of reduced incomes. That’s where the credit crunch aggravates the economy, as households with weak income can no longer look to borrowing to smooth uneven cash flows. Last Thursday’s report on consumer credit underscored that point showing the largest month-month drop in consumer credit outstanding since the Federal Reserve began compiling the numbers in 1950.

The employment report also showed the nation’s unemployment rate increased to 7.2%, the highest it has been since January 1993. Perhaps more significantly, the employment/population ratio, measuring the percentage of those over 16 who have a job, fell to 61.0%, its lowest level since November 1986. Translated, that means 39.0% of those over 16 are not working -- a percentage comparable to measures used during the Great Depression, when unemployment rates were calculated differently and reached a high (in 1934) of 24.9%.

Friday’s report on jobs also pinpointed the acceleration of the labor recession: September. From January through August, payrolls contracted by 655,000 -- 82,000 per month. From September through December, the economy shed 1,934,000 jobs, or 484,000 per month. The surge in job losses was apparent in a few notable industry sectors.

In the first eight months of the year, the nation lost about 43,000 manufacturing jobs per month, but in the last four months 111,000 per month; the pace of professional service jobs losses accelerated from 35,000 per month through August to 101,000 jobs per month for the last four months of the year and while the retail sector dropped 27,000 jobs per month in the first eight months of the year, it shed 77,000 jobs per month from September through December.

Even the health and education sector, which has added jobs, has decelerated. From January through August that combined sector added 54,000 jobs per month, a pace halved to 27,000 per month in the final third of the year.

If we are looking for a turn in the economy, ironically a further increase in the unemployment rate may be the signal. Consider a [mathematically] compact society with 11 potential workers, nine of whom are working, one of whom is unemployed while the last isn’t even bothering to look for work. In that scenario, the unemployment rate would be 10% (one “unemployed” divided by the sum of employed and unemployed).

As the economy improves, the individual on the sidelines decides to look for work and thus meets the definition of unemployed. With that shift, the unemployment rate would jump to 18% (two “unemployed” divided by the sum of employed and unemployed), but it would be a positive signal since there would be renewed confidence in the ability to get a job.

That may not happen for a while, and the upcoming data week could tell us why, particularly as we anticipate weak retail sales and falling prices. Falling prices can actually feed further into the malaise as consumers delay purchases anticipating more price cuts. With those purchases postponed, manufacturing and new orders by retailers are put off and the economy remains stalled.

Mark Lieberman is the senior economist for the Fox Business Network. Prior to joining FOX, he served as first vice president and manager of economic analysis and research at Washington Mutual in New York. Before that, he served as senior vice president at Dime Savings Bank of New York (which was later acquired by Washington Mutual), where he specialized in credit and risk management. He is a member of the Executive Committee of the New York Association for Business Economics. He has a degree in Economics from the Wharton School of the University of Pennsylvania.