Payrolls shrink by 159,000 in September, most in 5 years

WASHINGTON -- U.S. businesses slashed 159,000 jobs in September — the biggest slide in more than five years — the Labor Department said Friday in a report providing new evidence the economy is tumbling toward recession.

The unemployment rate, calculated through a separate household survey, held steady at 6.1%. As has been the case in recent months, there were large job losses in construction, manufacturing and retailing, while the health care and government sectors continued to add workers. But job erosion is widening with the financial services sector employment down 172,000 jobs since its peak in December 2006.

The 159,000 jobs lost in September were the most since March 2003, when the labor market was still struggling to get back on its feet after being knocked down by the 2001 recession.

More than 2.2 million Americans have lost their jobs in the past 12 months, as the unemployment rate has climbed 1.4 percentage points. The report follows a chain of dismal economic news in the past several weeks, including plummeting auto sales, a drop in factory orders and slowing in consumer spending, which makes up about two-thirds of economic activity. Home prices continue to fall, and credit markets worldwide are in severe distress, limiting consumer and business borrowing.

"The U.S. economy is shrinking, and there will be many more awful reports like this," says Ian Shepherdson, chief U.S. economist of High Frequency Economics, noting that the job loss was far higher than economists expected.

He and other economists predict the Federal Reserve would have to cut interest rates sharply to try to spur economic activity. The Fed has cut a key interest rate to a low 2%. With credit markets so constricted in recent days, consumers and businesses have not felt the benefit of the rate reductions — and are facing higher costs and limited availability of credit.

Another report Friday indicates the sluggish U.S. service sector barely grew in September.

The Institute for Supply Management said its non-manufacturing index came in at 50.2, slightly below August's 50.6 in August but in line with forecasts. A reading above 50 signals expansion.