The federal unemployment report last Friday was wretched, as you know, but there was more to be gleaned from it after a few days reflection than we could observe right away.

Let’s turn to our favorite independent labor analysts, Philippa Dunne and Doug Henwood, for the blow-by-blow account before determining what it all means.

Abridged Unemployment Report notes:

In purely numerical terms, the one-month loss of 533,000 jobs was the third worst since 1950, exceeded only by the loss of 603,000 in December 1974 and 629,000 in July 1956. But the labor force was a lot smaller then, so these comparisons are misleading.

In percentage terms, it was the 23rd worst loss in the last 58 years, putting it at the 97th percentile. You’d have to go back to 1982, and before that, 1957, to match the percentage loss. While losses so far since the December 2007 peak are slightly less than recession averages, most previous recessions were drawing to a close a year after their peaks. Not this time.

Losses were widely distributed across sectors

• Goods production lost 163,000, evenly divided between manufacturing (-85,000) and construction (-82,000). Within manufacturing, motor vehicles accounted for just 13,000 of the shrinkage; almost every other subsector registered a loss too.
• Private services lost a big 377,000, the eighth worst in percentage terms since 1950.
• Within services, retail, at -91,000, led the way down, but temp firms shed 78,000, and leisure and hospitality were off 76,000.
• Finance lost 32,000, half of it in “credit intermediation.”
• Health care was up 34,000. Government rose 7,000, all of it in state and local. That’s likely to change soon, as fiscal pressures bite.

There were sharp downward revisions to the September and October numbers

• October’s loss, reported last month as 240,000, is now 320,000
• September’s loss, reported last month as 284,000, is now 403,000, a total downward revision of almost 200,000. In any case, job losses over the last three months total 1.3 million, or around 419,000 per month.

The workweek fell 0.1 hour to 33.5 hours — an all-time low

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• Aggregate hours were off 0.9% for the month, two standard deviations below the mean. Goods led the way down, but services were down hard too.

While it’s a common practice in Europe to cite the number of unemployed as a headline indicator, we don’t do that often in the U.S. But it is worth pointing out that the ranks of the officially jobless crossed 10 million in October, and rose by another quarter-million in November. More than 5 million are classed as not in the labor force but wanting a job now, putting what Alan Greenspan used to call the pool of available workers at close to 16 million. The broadest measure of unemployment, the U-6 rate, which includes both these sets of would-be workers, along with unwilling part-timers, rose to 12.5% in November.

So What do the Numbers Mean?

Dunne and Henning conclude that as bad as this report is, it’s in the category of “bad recession” and not “total collapse.” Since more of the same seems likely in the coming months as companies cut costs to bring them in line with sales, the need for a very large fiscal stimulus will not be questioned even by conservatives.

What does total collapse look like, you might ask? Well, in December 1974 the U.S. economy dumped 602,000 jobs out of a labor force of 93 million. To be as bad now with a labor force of 155 million, the nonfarm payroll decline would have to hit 1 million in one month. It could still happen, but not until next year, if ever.

One reason that worse numbers might be ahead comes from a technicality. The Bureau of Labor Statistics updates its so-called birth-death model for businesses once a year, in January. Considering that this model added 832,000 jobs, purely as a model adjustment, in 2008, it could have a big impact going forward. (The birth-death model tries to account for the birth of small businesses during the year that are not counted in normal surveying methods).

My estimate is that the narrower U-3 measure of unemployment, now 6.8%, will move up toward the U-6 zone, or 11%, before turning around. Although the Obama Administration has pledged to put 2 million people to work as quickly as possible, the devil is in the details.

The Bright Side of Unemployment

Could there possibly be good news about unemployment? The answer is yes, for investors.

The reason: Companies need to right-size their businesses to align costs with revenue. To recover from recession, companies that slash expenses faster than the decline of their revenues will be the ones that stabilize first. Job-cutting is a painful but necessary step toward recovery, and that is why joblessness tends to rise even as the economy and stock market improve.

This is how companies repair themselves after previously going overboard on hiring, and it is also how economies overall heal themselves. When the government steps into the process…

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…it only smoothes the transition that market forces would effect on their own.

Acceleration of Job Losses

Now let’s talk for a moment about the Bureau of Labor Statistics’ Diffusion Index, which helps us understand the breadth of employment change across the 349 industries the government’s economists track.

The index fell in November from 37.8% to a record-low 27.6%. Translation: Three out of every four industries are conducting layoffs. What was largely contained to the financial, construction, retail, and auto sectors has spread like wildfire to once healthy areas of our economy. Not only is the actual number of unemployed growing but the number of still employed worried about losing their job is growing as well.

The speed of the firings is also accelerating. In fact, of the 2 million jobs lost since the last employment peak, two-thirds have been lost in just the past three months. That is amazing.

A Self Perpetuating Cycle

As a result of the increasing speed, reach, and depth of the labor market weakness, the American consumer is hurriedly adjusting to these fearful new economic realities by deeply cutting discretionary expenditures and increasing savings. This self-reinforcing trend is what famous economist John Maynard Keynes called the Paradox of Thrift. Simply put, while saving more is beneficial to individuals, since it helps prepare for possible layoffs, the aggregate effect is harmful since it worsens economic conditions and perpetuates the cycle.

The Take Away

It’s no wonder then that forecasts of consumer spending are moving into historically pessimistic territory. The economics team at Merrill Lynch is now looking for consumption to fall nearly 2% for the second half of 2008, and another 3% during the first half of 2009. To state the obvious, any consumer-focused business that cannot make a profound and justified case for spending to consumers will face serious issues going forward.

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This article was written by Jon Markman, contributor to InvestorPlace Media. For more actionable insights likes this, visit www.InvestorPlace.com.