US Employment Drop Triggers Fresh Fears

Source : Weekend TODAY, September 8, 2007

Analysts foresee Fed rate cut, more risk of recession

THE United States economy unexpectedly lost jobs in August for the first time in four years, increasing speculation that the Federal Reserve will have to reduce interest rates to counter an economic slowdown.

Employers cut 4,000 workers from payrolls, compared with a revised gain of 68,000 in July that was smaller than previously reported, the Labor Department said yesterday in Washington. The unemployment rate held at 4.6 per cent as almost 600,000 people left the workforce. Bonds rallied and the dollar weakened.

“The recession risk has certainly increased,” said Mr Zach Pandl, an economist at Lehman Brothers Holdings in New York. “It definitely cements the case for a rate cut at the next Fed meeting.”

The drop in jobs is the clearest sign yet that the deepening housing recession and turmoil in credit markets are hurting the wider economy. Payrolls are one of the main indicators, along with sales, incomes and production, that help determine the start of economic contractions, and yesterday’s report may raise the odds that the Fed reduces rates even before the Sept 18 meeting of policymakers.

Treasuries rose and stock index futures fell. The yield on the benchmark twoyear note slid below 4 per cent, indicating that traders anticipate a series of Fed rate cuts. The central bank’s current target rate is 5.25 per cent. Futures on the Standard & Poor’s 500 index fell 1 per cent to 1,464 at 9.02am in New York.

Wages gained 3.9 per cent in August from a year earlier. Workers’ average hourly earnings rose 5 cents, or 0.3 per cent, after a 0.3-per-cent increase the previous month.

Manufacturers, builders and the government led the drop in payrolls last month. Factory payrolls slid by 46,000, the most since July 2003, after slipping 1,000 a month earlier. Economists had forecast a drop of 10,000 in manufacturing employment.

Payrolls at builders dropped by 22,000 after falling 14,000 a month earlier. Government payrolls decreased by 28,000.

Mr John Silvia, chief economist at Wachovia in Charlotte, North Carolina, said :“The decline in manufacturing employment was much bigger than anyone expected. The probability of recession has increased pretty dramatically.”

Service industries, which include banks, insurance companies, restaurants and retailers, added 60,000 workers last month after boosting payrolls by 78,000 in July, the report showed. Retailers added 12,500 jobs after hiring 5,000 in July.

Average weekly hours worked by production workers held at 33.8. Average weekly earnings gained to US$591.50 ($901)last month from $589.81 the prior month.

Fed Chairman Ben Bernanke last week said the central bank would do what is needed to prevent the credit-market turmoil from undoing the six-year economic expansion.

Job and wage growth are needed to help sustain consumer spending, which accounts for more than two-thirds of the economy, as home values fall and loans become more difficult to get. Spending slowed to a 1.4-per-cent annual pace in the second quarter, down from 3.7 per cent in the previous three months. — BLOOMBERG