WASHINGTON Payrolls shrank in August for the first time in four years, the Labor Department 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 of 4,000 fewer non-farm jobs shocked financial markets that had anticipated continued job creation and drove 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."
Bush administration officials were out in force to try to allay fears that the turmoil in credit markets stemming from rising defaults on subprime mortgages was spreading.
Treasury Secretary Henry Paulson, on Bloomberg Television, said a softening housing sector "is going to extract a penalty on growth, 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."
White House economic adviser Edward Lazear told CNBC Television "there's always a chance of recession," but added: "We don't think it is likely."
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.
Another lawmaker, House Financial Services Committee Chairman Barney Frank, made a blunt and unusual call for the Fed to rescue the economy quickly with lower interest rates.
"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," the Massachusetts Democrat said.
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 Fed's policy-making Federal Open Market Committee is scheduled to meet on September 18. Analysts said a rate cut appeared certain and the only question was whether it will be a quarter-percentage point or half-point reduction.
Indeed, some financial markets participants speculated the central bank might feel pressed to take the rare step of lowering the benchmark federal funds rate, which has been unchanged at 5.25 percent since mid-2006, even before its scheduled meeting.
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 plunged at the start of trade and was down was down more than 200 points in mid-afternoon. The dollar's value hit a 15-year low against other key currencies.
"Everything in this number looks bad and we know things got worse. Fed has to act," said Andrew Brenner, market analyst for MF Global in New York.
Bond prices soared as investors shifted funds to safer havens from stocks.
The turmoil in credit markets only set in at mid-August and it is unclear how it may affect the overall economy. Some big financial services firms already have announced layoffs as they trim their subprime mortgage business.
In an interview with Reuters, Commerce Secretary Carlos Gutierrez said the economy was benefiting from rising exports and consumer spending was holding up.
"The economic fundamentals are solid and they say that the likelihood of growth and of expansion is a lot greater than recession," Gutierrez said.
Job losses in August were concentrated in the goods-producing sector. A whopping 46,000 manufacturing jobs were cut, the most since an 86,000-job cut in July 2003. Construction businesses shed another 22,000 jobs, up from 14,000 that were lost in July.
Service industries added 60,000 jobs in August.