Employers drop 4,000, raising recession fears

The nation's employers eliminated 4,000 jobs in August, the Labor Department said yesterday, bringing an end to four years of uninterrupted job growth.

The numbers suggested that the damage from the recent turmoil in the housing and financial markets could be spreading to the economy as a whole and raised fresh fears of a recession.

Economists also said the jobs report provides the Federal Reserve with ample justification to lower interest rates at least a quarter of a percentage point to support the economy when it meets Sept. 18.

The drop in employment, following a monthlong increase in the cost of credit prompted by losses in the mortgage market, is the clearest sign yet that the economy is in jeopardy. Payrolls are one of the main indicators, along with sales, wages and production, that help determine the start of economic contractions.

The employment report jolted the stock market because economists had predicted an August increase of about 110,000 jobs. The Dow Jones industrial average fell 250 points, or 1.9 percent.

If the jobs report had been merely lackluster, it might have been welcomed by investors as a sign that worry about inflation had abated sufficiently to make the prospect of a Fed rate cut all but certain. The reversal in job growth, however, went beyond expectations, raising concern that corporate profits will weaken as the market upheaval moves beyond the housing and financial sectors and casts a chill on the broader economy.

"That it was down 4,000 really is eye-catching," said John Shin, an economist for Lehman Bros., the New York stock brokerage. "What the payroll number confirms is that you may be seeing the damage spread across the rest of the economy."

The report also showed that the job market was significantly weaker in June and July than the government first reported. Revisions for those months showed that 81,000 fewer jobs were created than initially estimated.

Last month's drop was the first decline in jobs since August 2003. Payrolls fell by 42,000 at that time as the job market was struggling to recover from the 2001 recession.

"I think a lot of businesses are moving to the sidelines to wait and see how things shake out," said Ken Mayland, president of ClearView Economics.

Construction and manufacturing were the hardest-hit industries last month, losing a combined 68,000 jobs. That offset hiring in education, health and retail. About 28,000 government positions were eliminated as well.

The national unemployment rate, taken from a separate survey of American households, was unchanged at 4.6 percent. But that was mostly because many people stopped looking for work and, thus, were not counted as unemployed.

The surveys that made up yesterday's Labor Department report measured employment conditions from Aug. 12 to Aug. 18, when the credit squeeze and subsequent stock market turmoil began unfolding in force.

The biggest question for the Federal Reserve since then has been what the effect would be on the economy as a whole.

Investors and economists are widely expecting the Fed to lower interest rates by a quarter-point, to 5 percent, at its next meeting. That would help spark the economy by making borrowing less expensive. Some are expecting more than one interest rate cut before the end of the year.

The Fed has not changed rates since June 2006.

"The odds of a bad outcome [for the economy] have gone up, and, therefore, it makes sense for the Fed to take out some insurance," said Bill Cheney, chief economist at John Hancock Financial Services. He predicted a bolder, one-half-percentage-point rate cut by the Fed. "Clearly the chances of a recession are higher than they were," he said.