Economy loses 4,000 jobs, first drop in 4 years

WASHINGTON -- There were 4,000 fewer jobs on U.S. payrolls in August, first net loss in four years, although the unemployment rate stayed at 4.6%, the Labor Department said Friday.

The report portrays a far more dismal picture than economists expected, and raises the odds of a Federal Reserve interest rate cut; Fed policymakers are scheduled to meet next Sept. 18.

The monthly job loss was the first since August 2003. It was led by continued problems in the goods-producing sector of the economy. The construction industry lost 22,000 jobs during the month, while factory payrolls plunged by 46,000, despite an improving export picture.

The services sector — now the bulk of the economy, encompassing retailers, banks, restaurants, health care and other like firms, continued to expand, creating 60,000 jobs. Government employment fell by 28,000 in August.

Treasury Secretary Henry Paulson told Bloomberg television that he was not totally surprised about the decline in jobs in August given housing troubles and less government hiring, but he still sees the U.S. economy as healthy.

The monthly overall job loss compares to a 68,000 gain in July, a figure much smaller than the Labor Department originally reported. The unemployment rate would have been higher if not for a large jump in the number of people who left the labor force during the month, including many teenagers.

"The much feared and anticipated contagion on the weakness in the housing and credit markets is well underway," Moody's Economy.com said in an advisory to clients, adding that downward revisions to June and July payroll figures, along with other data, indicate there is "some chance that the economy entered a recession during the summer months."

The Fed is closely watching the jobs report for indications of whether recent turmoil in worldwide financial markets, and a deepening depression in the housing sector, threaten the overall economy. Fed Chairman Ben Bernanke said in a speech last week the central bank will respond if there is evidence that problems in financial markets are hurting the broader economy.