US lost jobs for 1st time in 4 years

Employers cut jobs for the first time in four years last month, the government reported yesterday, driving stock prices down in the United States and Europe and raising fears the slowdown in the housing and credit markets brought on by the crisis in subprime mortgages is spreading across the economy.

"I can't find any mitigating sugarcoating to this," said James Swanson, chief investment strategist at MFS Investment Management in Boston. "The housing problem is catching up with the economy."

While the unemployment rate remained unchanged at 4.6 percent, employers cut 4,000 jobs in August, according to the Bureau of Labor Statistics. More troubling, the agency revised employment figures downward for June and July. Job declines were especially steep in the construction sector, heavily dependent on housing, and in manufacturing.

"What you have is not only a surprise in August, but a suggestion the slowdown in the economy was happening prior to the credit problems," said John Silvia, chief economist for Charlotte, N.C., bank Wachovia Corp.

The declines were a drop in the bucket for an overall workforce of 153 million people, but they surprised many economists who had expected business to add perhaps 50,000 jobs last month. The unemployment rate would have been higher except for about 340,000 people leaving the workforce.

Often stocks rise on poor workforce reports because investors expect less inflationary pressure. That wasn't the case yesterday, however, as shareholders seemed more concerned about the economy's overall direction. Also, the federal statistics showed hourly wages rose in August by 3.9 percent compared to a year ago, meaning workers had more money to spend.

The Dow Jones industrial average fell 249.97 points, or 1.9 percent, to close yesterday at 13,113.38. Markets in London, Paris, and Frankfurt were down 2 to 3 percent.

The jobs report was especially weak compared to the first five months of the year, when employment grew 147,000 jobs per month. Compared to July, the manufacturing and construction sectors showed deep declines, losing 46,000 and 22,000 jobs respectively and reflecting ongoing cuts in the US auto industry and weaknesses for residential specialty trade contractors.

Government jobs also declined 28,000 in August, a statistic that economists said could be a blip.

The sector with the biggest gain was education and health services, which added 63,000 jobs nationally.

Separately, lender Countrywide Financial Corp. said yesterday it will cut as many as 12,000 jobs, about 20 percent of its workforce. The company said the cuts are needed because it expects new mortgages to fall about 25 percent in 2008 from this year's levels.

Yesterday's labor report still left some questions, with some economists saying it isn't clear that the jobs decline will continue or if an economic slowdown is underway. MFS's Swanson noted international economies are still growing, and boosting US corporate balance sheets. In addition to the rising wages, Eastern Bank chief economist John Bitner noted other recent manufacturing surveys have found growing manufacturing output and strong growth in most industries outside real estate and auto sales. And major retailers such as Target and Wal-Mart reported strong sales in the critical back-to-school season last month.

"We think companies are being cautious about hiring due to all the uncertainty, but we don't see this as a sign of the economy tipping into a tailspin," Bitner said. Strong sales reported by chain stores on Thursday also suggest consumer spending isn't pulling back, he added.

But Jared Bernstein, an economist at the Economic Policy Institute, a Washington think tank often aligned with Democratic positions, called the jobs report "extremely weak" and said it provides much evidence that real estate driven credit problems are spreading.

"Many of us have been waiting to see whether there was a contagion effect from the financial markets turmoil into the job market. This report connects those dots with a vengeance," he said.

Scheduled to meet Sept. 18, the Federal Reserve already faces wide calls for interest rate cuts as a way of boosting economic confidence and stimulating borrowing and spending by consumers and businesses.

In the short run, several economists said yesterday's labor report makes an interest rate cut of a quarter of a percentage point more likely, with another one perhaps to follow in October.

Politically, the report set off a debate between Bush administration officials who sought to play down fears the economy is tipping toward a recession and congressional Democrats. Interviewed by Bloomberg TV, Treasury Secretary Henry Paulson said the numbers were "not the kind of data I have been looking to see, but 47 months of job increases is a great streak, and it's not at all surprising to me to see this kind of data, given where we are in expansion." But he noted a big factor in the report was an overall decline in government jobs that don't reflect the overall economy, and said he still expects economic growth for the rest of 2007.

US Representative Barney Frank, the Newton Democrat who heads the House Financial Services Committee, said the report showed deeper risks. "The deeply troubling August employment report should end any debate about the action that the Federal Reserve Board must take when the Open Market Committee meets on Sept. 18," Frank said in a statement.

"The notion that inflation risks outweigh the risks to output and employment growth is not supported by the evidence and a strong response is required - specifically, a meaningful interest rate cut," Frank said.

Ross Kerber can be reached at kerber@globe.com. Material from the Associated Press was used in this report.