For months investors have been dealing with economic data that seem to be sending conflicting signals about the direction of the economy and the stock market. That trend continued Friday when the U.S. Labor Department announced nonfarm payrolls had shed 345,000 jobs, a loss considerably less than the 525,000 analysts were anticipating and the smallest drop since last fall. However, the agency added the national unemployment rate had reached 9.5%, a worse-than-expected figure. The market s reaction: Stocks barely budged Friday even though many investors had waited the entire week for the data.

Jobs reports have become important barometers of the market. "Employment loss during the first eight months of this recession was relatively mild compared to previous recessions, but then it fell off a cliff and now far surpasses the employment loss of the early 1980s," wrote Economic Policy Institute president Lawrence Mishel. If employers start to hire again or at least stop laying people off it would show the economic recovery may finally be swinging into gear. What s more, one of the only reasons why consumers will start spending their hard earned cash again is if they feel comfortable about the safety of their jobs and their employers.

So what to make of the market s nonreaction even as the labor data showed a softening of job losses? One explanation is that market watchers don t believe the figures. Louise Purtle, chief strategist at CreditSights, says there has been a long pattern of job loss numbers being revised upward during the recession. That means the May number just released could be a statistical quirk, not a sign of a true recovery. "If you remember, investors took heart back when the April data were released because the economy shed only 539,000 jobs vs. the 610,000 job losses that had been expected," she wrote Tuesday. "It's hard to actually imagine where... jobs are being created right now and easy to imagine that this revision will have to be reversed in subsequent revisions."

That could mean numbers later in the year that show more deterioration in the labor market. "Corporate downsizing may continue to remain slow during the summer months, but if the past is any indication, we could see the pace accelerate again in the latter half of the third quarter through the end of the year, said John Challenger, chief executive officer of Challenger, Gray & Christmas.

At the same time the market was digesting labor figures it was also eyeing movement on the 10-year Treasury bond the premium investors demand for purchasing government debt. It spiked last week, with a Friday yield of 3.67%, up from 3.55% late on Wednesday. That climb has pushed up mortgage rates, which could slow any pickup in housing, and it could eventually put the brakes on the recent rally.

The problem is that if the government moves to actively keep those rates down it risks triggering inflation. We've been here before, says Don Rissmiller, chief economist at Strategas Research Partners, when government stimulus sought to break the grip of the Great Depression. In a May 31 note he observed: "When the government decided to spend money, the economy grew. The problem was the sustainability of the growth. If we do not bring unemployment down, and create substantial endogenous income growth, the looming issue remains 'when is 1937' i.e., what happens when government stimulus is inevitably removed from the picture."

Commodities and inflation also weighed on market pundits minds as oil continued its run-up. Bank analyst Richard Bove noted Friday that the recent rise in energy and metals prices crude prices topped $70 during Friday trading could lead to "a growing fear that the actions taken by the Federal Reserve will lead to sharp inflation in the next few quarters."

That could be creating a situation where investors are essentially building their own bubble because they don t want to miss out on the rally, even if its sustainability is in question. Bill Stone, chief investment strategist at PNC Financial Services Group, warns that some big investors may be buying because they feel they have little choice and can't keep cash on the sidelines.

"The market may, however, find itself at a place where less-bad data will need to become actually better data in order to satisfy investors," he wrote Monday. "One would do well to remember that neither the economy nor the markets recover in a straight line."