Payrolls post first decline in 4 years

By Glenn Somerville

WASHINGTON (Reuters) - Payrolls shrank in August for the first time in four years, the government reported on Friday, prompting calls for the Federal Reserve to lower interest rates before credit market turmoil drags the economy into recession.

The unexpectedly bleak report from the Labor Department showing a 4,000 drop in non-farm jobs shocked financial markets, driving down stock prices and the dollar's value.

"It's dreadful," said Michael Metz, chief investment strategist for Oppenheimer & Co. "It shows the so-called support for the economy from rising employment is rapidly eroding and to me it seems almost inevitable we are heading for recession."

However, Bush administration officials sought to allay fears that credit-market turmoil stemming from problems with subprime mortgages was spreading.

"I've been saying that the housing decline ... and what we're going through in the credit markets is very apt to extract a penalty on growth, but the economy is going to continue to grow in the second half of the year," Treasury Secretary Henry Paulson said in an interview on Bloomberg Television.

The last time the economy shed jobs was in August 2003, when a drop 42,000 non-farm jobs was reported.

PUNCH IN THE GUT

The chairman of the Congressional Joint Economic Committee, Democratic Sen. Charles Schumer, said the soft jobs report was "a punch to the gut of our economy" that implied the subprime lending crisis threatens to engulf the broader economy.

In addition to the August job losses, the Labor Department revised down its estimates for hiring in June and July by a total of 81,000. It said 68,000 jobs were added in July rather than 92,000 and 69,000 in June instead of 126,000.

Despite the job losses in August, the unemployment rate -- complied from a separate survey of households -- was unchanged from July at 4.6 percent as a shrinking workforce offset a decline in employment. It has held in a range from 4.4 percent to 4.6 percent since last September.

The Federal Reserve's policy-making Federal Open Market Committee is scheduled to meet on September 18, but the weak jobs report is likely to heighten speculation it could lower interest rates even before then.

Analysts said a rate reduction at the next FOMC gathering seemed certain and the only question was whether it will be a quarter-percentage point or half-point reduction in the current federal funds rate, which has been unchanged since mid-2006.

CREDIBILITY ON LINE

"Leaving the fed funds rate unchanged 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 situation," said Roger Kubarych of UniCredit HVB in New York.

The Dow Jones industrial average was down more than 220 points at mid-morning and the dollar's value hit a 15-year low against other key currencies after the jobs report was issued.