When the labor market is in trouble, the US economy is in trouble. Jobless claims rose 516k last week to the highest level since September 2001. The claims for unemployment benefits was only surpassed in the 2.5 weeks following 9/11.

Extrapolating the jobless claims data to non-farm payrolls and we could see non-farm payrolls top 300k before the end of the year. In September 2001, the last time jobless claims were at current levels, non-farm payrolls dropped 244k and in October of that same year, it hit that recession cycle’s low of -300k.

Retail sales also dropped 1.8 percent in September 2001, indicating that the deterioration in the labor market will cause a sharp contraction in consumer spending. Although the NBER has yet to admit the US economy is in a full blown recession, the jobless claims data is already beyond at recessionary levels.

The US dollar remains firm as the latest piece economic report from the US confirms the seismic challenges facing the US economy. The global markets did not receive Paulson’s changes to the TARP plan well and I continue to believe that in this troubling market environment, the US dollar and Japanese Yen will be the winners.

G20 Meeting Right Around the Corner

World leaders will be gathering in Washington tomorrow for an Emergency Economic Summit. Unfortunately I am skeptical of any groundbreaking announcements. Even though Gordon Brown, Prime Minister of the UK will want to push for reforms, President Bush may not want to commit Barack Obama, his successor, to any measures that he may not support.

Kathy Lien is Director of Currency Research at GFT, and runs KathyLien.com.