Jobs data stoke recession fears

WASHINGTON — The first monthly decline in new jobs in four years raises fears of recession and virtually guarantees that the Federal Reserve will cut a key interest rate this month to spur the economy, experts said Friday.

The economy shed 4,000 jobs in the August reporting period, according to statistics the Labor Department released Friday. That's not a huge number, but it marks the first fall in job creation since August 2003.

The report shook up economists and policymakers who had predicted employment would grow by about 125,000 jobs. It was particularly disturbing because many of the losses occurred before August's financial turmoil, which seems likely to make October's report even worse.

June and July payroll data also were revised downward by 81,000 jobs.

"We did not expect a report as awful as this," said Ian Shepherdson, chief U.S. economist at the consulting firm High Frequency Economics. Many analysts said the odds of a recession resulting from the recent turmoil in the housing and credit markets have risen.

It was the strongest evidence yet that problems in the housing market were seeping into the broader economy.

The unexpected news sent stocks skidding as investors fretted that chances of a recession are growing. The Dow Jones industrial average fell 249.97 points, or 1.9 percent, while the Nasdaq fell 48.62 points, 1.9 percent.

The unemployment rate remained unchanged at 4.6 percent, but most analysts had expected job growth, however weak. Instead, they saw employment dips in residential construction and financial services because of the slowdown in housing and home-finance sectors.

The drop in government hiring, especially in education and local government, may prove a harbinger. Local-government hiring fell by more than 100,000 jobs in the past three months, and that's often a sign of declining tax revenues.

"The implication is there were squeezes on revenues, in part related to property [value] downturns. It's not only property taxes that come from property but fees on new development," said Nigel Gault, chief U.S. economist for Global Insight, a forecasting firm in Lexington, Mass.

Financial markets reacted wildly because they weren't expecting a negative report. The Federal Reserve's Beige Book, a summary of economic activity throughout the country, suggested earlier in the week that the economy remained strong.

Many analysts had doubted the Fed would cut interest rates when the Federal Open Market Committee meets Sept. 18.

"Now we're going to get a cut," Gault said. "The question is how much."

The Fed is likely to lower its benchmark federal funds rate by at least a quarter-point to 5 percent. This overnight rate that banks charge each other serves as an indicator for a wide array of lending rates for businesses and consumers.

Wall Street has been in turmoil for nearly a month amid growing worries that problems with certain mortgages given to subprime borrowers — those with the weakest credit histories — will spill into the broader economy.

Gault expects the doldrums to linger. He said the Labor Department figures were gathered the week of Aug. 12, amid the decline in global stock markets and the freeze-up of credit. That means employers probably had not had a chance to react with layoffs, and, therefore, the survey didn't reflect the full extent of damage caused by the market upheaval.

Material from The Washington Post and Los Angeles Times

is included in this report.