Layoffs in mortgage industry loom large

The U.S. economy is expected to have created 120,000 jobs in August, but that figure belies the problems in one pocket of the labor market.

The mortgage industry has slashed nearly 25,000 jobs so far this month, and the potential labor impact of the mortgage crisis has added to Wall Street's recent worries about the economy.

According to labor consulting and placement firm Challenger, Gray & Christmas, there have been 42,381 layoffs in the mortgage industry so far this year, with 58 percent of them coming this month.

"We haven't seen a wave of layoffs like this since Sept. 11, when the airline industry dropped 100,000 people on the labor market," says the firm's chief executive, John A. Challenger.

Layoffs have perhaps the most direct impact on economic growth; consumers need income to keep spending.

For now, the labor market appears all right despite these mortgage-related layoffs, since the rest of corporate America still seems to be enjoying profit growth and modest expansion.

Yet more mortgage defaults are expected, especially as more adjustable-rate mortgages reset in the months to come. And nobody knows if additional industry layoffs are coming.

"Because we're just at the beginning here, we don't know how long this is going to last," Challenger says of the job cuts.

If more layoffs are in store in the mortgage and broader financial industries, that could have a spiral effect on the economy.

"Companies spend money when they create jobs, and if they don't spend money, there are fewer jobs," says Sam Stovall, chief investment strategist at Standard & Poor's.

"If you start to see layoffs spread from Wall Street to Main Street, then you've got a problem," he said.