1st monthly jobs decline in 4 years

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The economy in August unexpectedly posted its first monthly decline in jobs since 2003, with manufacturing and construction hit the hardest, in a sign that the danger of recession is rising as the housing slump deepens.

The jobs decline of 4,000 reported yesterday by the Labor Department, which also said 81,000 fewer jobs were created in the previous two months, will force the Federal Reserve to slash interest rates this month to revive what had been the strongest sector of the economy, analysts said.

Financial markets plummeted on renewed worries about the economy, with the dollar hitting a 15-year low against world currencies, market interest rates plunging in anticipation of lower Fed rates, and the Dow Jones Industrial Average falling 250 points.

"This is a truly ugly report" that undercuts the arguments of some Fed governors that the economy is strong enough to withstand the housing slump and credit crunch because of healthy growth of jobs and income, said Roger M. Kubarych, economist at Unicredit Markets.

While hourly earnings maintained their 3.9 percent pace of growth in the past year, the decline in jobs and overtime hours point to a rare drop in wage income during the month. Even the seemingly sturdy unemployment rate of 4.6 percent belied weakness, as it resulted from a huge 592,000 contingent of workers exiting the work force.

The Fed may slash interest rates by one-half percentage point or more at a Sept. 18 meeting of its rate-setting committee, Mr. Kubarych said. Not doing so "would be harmful to the economic outlook and would greatly damage the Fed's reputation as a skillful navigator of the economic and financial storms that have been unleashed by the worsening housing market situation," he said.

In a measure of how concern about the economy has grown since a full-blown credit crunch emerged last month, 60 percent of economists polled by the National Association of Business Economists say that recession is now the biggest risk facing the economy, rather than inflation. That is a sea change from the outlook just one month ago.

The financial markets reflected the dramatic change yesterday, with market interest rates falling across the board and the dollar plunging against other major currencies in the expectation that both U.S. growth and interest rates will be considerably lower in the months ahead. Stock markets fell on the worse-than-expected job news, despite the widespread belief that the Fed will move quickly to try to resuscitate the economy.

It was "shockingly weak," said Stephen Stanley, chief economist at RBS Greenwich Capital, noting that job growth in the past three months has averaged 44,000 — down more than 100,000 from growth in the first five months of the year. Wall Street economists had been expecting solid growth to resume last month with a 100,000 gain.

"The degree of weakness is too severe to dismiss," he said, although "we're not ready to concede that the labor market has weakened as much as these data would suggest."

While a 23,000 drop in housing construction jobs was believable and is likely to be repeated in the months ahead, he said, a reported 46,000 job-loss figure in manufacturing seemed "flukey" for all but the auto sector, because manufacturing activity has been growing solidly.

Also, a 28,000 drop in government jobs — mostly in state and local education — "is quite clearly temporary" and likely to be reversed next month, he said.

Taking out these potential distortions, Mr. Stanley believes job growth has fallen less steeply than reported to about 50,000 to 75,000 a month — "subpar, for sure, but not disastrous." Nevertheless, he said the job losses may have been understated in one respect: The Labor Department survey was taken too early last month to reflect the loss of tens of thousands of jobs in mortgage finance announced afterward.

Concern about the economy ricocheted yesterday from Capitol Hill to Main Street.

Joint Economic Committee chairman Sen. Charles E. Schumer, New York Democrat, called the job news "a punch to the gut of our economy," and said it should be a "wake-up call" for federal regulators who have been complacent about the damage to the economy from the housing and credit crunch.

"Stock market prices are not alone in their free fall. Small business optimism is also along for the downward ride," said Michael Alter, president of SurePayroll, a payroll services firm for small businesses, which is finding that hope for the future has dropped dramatically in recent months among small-business owners — a loss of confidence that points to fewer jobs ahead.