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Why the jobs picture is even worse than you think

Just glancing at the headlines made the September jobs report look bad.

Digging inside the details makes it look even worse.

Wall Street fretted over the usual culprits Friday — the collapsing labor force participation rate, the weak wage growth and just the overall softness in the headline nonfarm payrolls figures.

But there was even less than meets the eye here, suggesting that the jobs market may have found its own "new normal" — a prolonged, secular malaise that indicates American workers will be looking at the job recovery's glory days in the rearview mirror.

"It's going to get a lot worse," said Peter Schiff, head of Euro Pacific Capital, who has been predicting doom for the economy and the likelihood that conditions will keep the Federal Reserve handcuffed when it comes to raising rates. "Right now we're talking about the economy creating fewer jobs than had been expected. There's a good chance that by next year, we're shedding jobs."

Some context is necessary, as it's never wise to look at one month's results and try to draw broader conclusions about something as complex as the U.S. employment picture.

Construction on a new Pulte Homes development in Phoenix.
Getty Images
Construction on a new Pulte Homes development in Phoenix.

It wasn't just, then, that September was bad, with its meager addition of 142,000 jobs that was way below the Street's estimate of 203,000. There were plenty of other issues.

The notoriously volatile August numbers were supposed to get a good lift higher from the originally reported 173,000. In fact, Goldman Sachs economist David Mericle on Thursday predicted "a substantial upward revision" to the August estimate, based on a history that pointed to at least 35,000 positions added to the initial count. (Overall, Goldman, which is one of the better forecasting firms on the Street when it comes to the payrolls number, was looking for an above-consensus 215,000.)

Read More Job creation misses big in September

Instead, the report got knocked down to a paltry 136,000. Ditto for July, with the robust 245,000 print coming down to 223,000. Six of the past eight reports have been revised lower in subsequent months.

Taken together, the three months averaged 167,000, a total that, while representing expansion, also signifies a major slowdown from the 260,000 per month clip for all of 2014. Moreover, at the beginning of the year, the three-month average was 312,000. Overall in 2015, job creation is now below the 200,000 milestone, sitting at 198,000 and drifting lower.

While most of Wall Street lamented the jobs numbers, the Obama administration opted for a positive spin.

"We're still adding jobs," Jason Furman, chairman of the president's Council of Economic Advisers, told CNBC. "If you look at the last year, we've had very strong domestic momentum, we've added a lot of jobs in the last year, the unemployment rate has come down at a relatively fast pace over the last year so I feel good about overall the direction we're going in."

Momentum, though, argues against the administration's optimism. One below-the-radar indicator helps explain the problem.

The establishment survey's diffusion index is a fairly simple sentiment measure of whether more companies are hiring or laying off. A reading above 50 denotes expansion; a reading below signifies that hiring is contracting.

The level for September was 52.9. Yes, that represents that more companies are hiring than not, but it's down from 55.5 in August, 60.1 from July and 61.4 a year ago. The direction is pretty clearly to the downside, and with a host of high-profile layoffs in recent weeks unlikely to change soon.

Read MoreKeeping a tally of job cuts at major companies

"This is cause for pause. Weak in terms of depth and breadth," David Rosenberg, senior economist and strategist at Gluskin Sheff, said in reaction to the diffusion trend.

Rosenberg extrapolated the data a step further, incorporating the downward revisions and a decline in the workweek and figured the "real payroll number was -265,000."

Future economic numbers are likely to be impacted by the September data, he said, with industrial production expected now to show at least a 0.3 percent monthly decline on top of a 0.4 percent drop for August.

"There is not a chance that the Fed raises rates anytime soon," Rosenberg said in his daily report for clients.

Euro Pacific's Schiff believes the economy is headed for a recession that will necessitate the Fed not only to keep rates at zero but also ultimately to institute the fourth round of money printing, or quantitative easing, a program that sent the central bank's balance sheet past $4.5 trillion but has a spotty record when generating economic growth.

Traders may be pricing in just such a move, with a massive turnaround Friday. Stock indexes opened sharply to the downside, but the midday reversal was shaping up to be the biggest change in direction for the market in about four years.

"Companies lay people off as the result of a recession," Schiff said. "I'd been saying since the beginning that the Fed was never going to be raising rates because raising rates is impossible given the state we're in."

Futures traders agree. October now stands just a 2 percent chance as being the month for the U.S. central bank to hike for the first time in more than nine years, according to the CME Group. December is at just 29 percent, January is at 39 percent and March is priced in as the most likely month, just barely, with a 51 percent probability.

Other economic readings are likely to keep the Fed on the sideline.

Third-quarter economic growth is slowing rapidly. The Atlanta Fed's GDPNow tracker is expecting gross domestic product to advance just 0.9 percent, a number that has been taken down nearly a full percentage point from its most recent target and does not include Friday's dismal jobs reading.

Read MoreJobs miss is the 'worst case scenario' for market

For years, Rosenberg, formerly of Merrill Lynch, had been known as one of Wall Street's most prolific bears. Of late, he's turned bullish on markets and the economy. However, the bad September jobs news combined with other factors has him worried.

"If people are surprised at this turn of events on the macro side, perhaps it comes down to one point (Fed Chair) Janet Yellen made at her recent post-meeting press conference — notably, the comment on the rapid tightening in financial conditions," he said. "I am not bearish here on the outlook, but am becoming more cautious at the margin and my comfort level (is not) quite what it was a few months back."