May 4, 2012 / 9:01 PM / in 7 years

Gloom builds for euro zone, United States

NEW YORK/LONDON (Reuters) - The euro zone economy worsened markedly last month and U.S. employers cut back on hiring, according to two reports on Friday that dampened hopes for gradual recovery on either side of the Atlantic.

In Europe, the purchasing managers indexes (PMIs), which primarily cover services, suggested a recession across the continent’s currency union could now extend to mid-year and be deeper than previously thought.

The gloomy surveys clashed with the picture painted by European Central Bank President Mario Draghi, who on Thursday spoke of a gradual recovery taking place in the euro zone during the course of the year - although he did speak about risks.

In the United States, a government report showed employers added a disappointing 115,000 workers to payrolls last month and, critically, many Americans stopped looking for work. Economists had expected 170,000 new nonfarm jobs, and the report could hurt President Barack Obama as he steps up a re-election campaign that will likely hinge on the state of the economy.

Though the U.S. unemployment rate edged down to 8.1 percent from 8.2 percent, stocks .SPX fell sharply as fears grew that the erratic recovery of the world's largest economy was sputtering.

“This shows just how painfully slowly the U.S. economy is growing,” said Thanos Bardas, a portfolio manager at Neuberger Berman in Chicago, which manages nearly $200 billion in assets.

The U.S. government did, however, revise upward earlier estimates of payroll growth in February and March, and the euro zone surveys indicated better progress among Chinese companies.

But positive signs were few.

The euro zone surveys raise questions over whether the trillion euros in loans the ECB has pumped into the banking system since December had filtered into the real economy.

PMIs have a much better record of tracking economic growth than do the forecasts of ECB policymakers, who held a meeting on Thursday before Draghi made his comments.

“If you look at Spain, then using the word recovery is an insult. Aggregated all together, it looks to us like (the euro zone economy) is contracting,” said Danny Gabay, director at Fathom Financial Consulting in London.

“We’ve seen unemployment rise in a number of countries and in the so-called bailed out countries, you’re seeing deflation and unemployment - some quite seriously negative numbers.”

JOBS PICTURE DIMS

Markit’s Eurozone Services PMI, which gauges business activity over a month, came in at 46.9 in April, sharply lower than 49.2 in March. Anything below 50 signifies contraction.

That was also a full point lower than the preliminary reading of 47.9 reported two weeks ago, which itself was far weaker than any economist polled by Reuters had expected.

The downward revision to the final services PMI reading was the steepest since October 2008, the month after U.S. investment bank Lehman Brothers collapsed, triggering a global sell-off in stock markets and ushering in the Great Recession.

PMI compiler Markit said the latest surveys were consistent with a 0.5 percent quarterly economic contraction. Economists polled by Reuters last month thought the euro economy would shrink 0.1 percent in the present quarter. <ECILT/EU>

“Little can be said to remain of any ‘core’ of strength in the region,” said Chris Williamson, chief economist at Markit. “Growth has practically ground to a halt even in Germany, and France has joined Italy and Spain in seeing a strong rate of economic decline.”

With unemployment already at a 15-year high in the euro zone, the surveys suggested there will be no let-up in the number of job losses soon.

Hiring in the United States has now slowed for a third straight month, and the slump could open the door slightly wider for the U.S. Federal Reserve to do more to help the economy.

The report showed that the participation rate, a measure of how many Americans are looking for work, fell to a 30-year low at 63.6 percent of the population, as more people dropped out.

U.S. government bonds declined on Friday, while the dollar slid against the yen.

The story is very different in Asia where China’s economy, which got off to a slow start to the year, is beginning to show signs of growing faster.

The HSBC China Services Purchasing Managers Index rose to 54.1 in April from 53.3 in March, its strongest reading since October 2011. That followed a small rise in HSBC’s manufacturing PMI released earlier this week.

China’s domestic economy has been struggling to compensate for lackluster export orders for goods produced by the country’s vast factory sector. Demand from the United States and the European Union has still not recovered to where it was prior to the 2008-09 global financial crisis.

Editing by Jeremy Gaunt; and James Dalgleish

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