Job cuts raise fear of recession, pressure Fed

WASHINGTON -- For the first time in four years, employers have cut jobs, raising new fears that a deep housing slump and a painful credit crunch could push the economy into a recession.

Pressure is building on the Federal Reserve to lower interest rates. Many economists predict the deteriorating employment climate will lead to a rate cut Sept. 18.

A report released Friday by the Labor Department showed the nation's payrolls shrank by 4,000 in August. It was the first decline in jobs since August 2003. Payrolls fell by 42,000 at that time as the job market was still struggling to recover from the 2001 recession.

"This was a lousy report," said Nigel Gault, economist at Global Insight.

The unemployment rate held steady last month at 4.6 percent, mainly because hundreds of thousands of people left the job market.

Job losses in construction, manufacturing, transportation and government swamped gains in education, health care, leisure and hospitality and retail. Employment in financial services was flat.

Employers are hiring less because uncertainty about the country's economic health is growing. The ailing housing market and credit problems that have unhinged Wall Street are main culprits behind businesses' fresh sense of caution.

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

On Wall Street, stocks tumbled. The Dow Jones industrial average plunged 249.97.

Federal Reserve chairman Ben Bernanke said last week that the Fed stands ready to do all that is needed to keep the six-year-old economic expansion alive.

Economists increasingly believe the Fed will cut a key interest rate, now at 5.25 percent, by at least one-quarter percentage point at the September meeting. The Fed has not lowered this rate in four years.

"The odds of a bad outcome 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 predicts the Fed will cut rates by a half-percentage point. "Clearly the chances of a recession are higher than they were," he said.

Political pressure on the Fed also is mounting.

Rep. Barney Frank, D-Mass., chairman of the House Financial Services Committee, urged the Fed to lower rates. "A strong response is required -- specifically a meaningful interest rate cut," he said.

Those with jobs, meanwhile, did see modest wage gains.

Average hourly earnings rose to $17.50 in August, up 0.3 percent from July. Over the past 12 months, wages increased 3.9 percent. Wage growth supports consumer spending, a major ingredient for a healthy economy. If the job market continues to lose steam, though, wage growth will eventually slow, too, economists said.

The new employment figures revealed the first major crack in the job market. It had been holding up fairly well during the housing slump, which has persisted for more than a year. But an eruption of credit problems that started with high-risk mortgages and has spread has added to stresses faced by employers and the economy.

Credit is the economy's life blood. If it becomes more difficult to obtain, people might tighten their belts and companies might spend and invest less, including cutting back on hiring. That would crimp overall economic activity.

Under a worst-case scenario, the economy could slip into a recession this year. Earlier this year, former Fed chief Alan Greenspan had put the odds at one in three.

Commerce Secretary Carlos Gutierrez, in an interview with The Associated Press on Friday, said there was a "low likelihood" of a recession and that the "most likely scenario is that we will get through this dip and we will continue to see growth."

The economy, which grew at a brisk 4 percent in the April-to-June period, is expected to slow to half that pace in the three months from July through September. Against this backdrop, the unemployment rate is expected to creep higher, reaching close to 5 percent by the end of the year.

The 4,000 net jobs cut in August are a tally from both private and government employers. The government actually sliced 28,000 jobs, while all private employers added 24,000, the fewest since February 2004.

Disappointed economists were expecting total payrolls to grow by around by 110,000 in August.

Factories led the way in job cuts; they slashed 46,000 positions last month, the most since July 2003. Construction companies eliminated 22,000 jobs, the most in six months. The carnage could turn out to be even worse because the report -- based on information as of mid-August -- doesn't capture the full brunt of the credit crisis which intensified during the month.

Adding to the gloom: the economy produced 81,000 fewer jobs in June and July combined than the government previously thought.

President Bush's handling of the economy has gotten lukewarm ratings from the public. Only 41 percent approved of the president's economic stewardship in early August, according to an AP-Ipsos poll.

Mindful of political backlash heading into the 2008 elections, the Bush administration and Democrats on Capitol Hill have been scrambling to help millions of homeowners at risk of losing their homes and looking for other ways to limit the fallout.

Sen. Hillary Rodham Clinton, D-N.Y., who is vying for her party's presidential nomination, pointed to the new employment report as evidence that "the Bush administration's simplistic supply-side economic strategy is not working for working Americans."

Another presidential hopeful, Sen. Barack Obama, D-Ill. also weighed in, saying: "The administration's failure to lead while thousands of Americans found themselves in danger of losing their homes is now affecting the broader economy."

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On the Net:

Employment report: http://www.bls.gov/home.htm