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.

"One number is not a trend, but this will scare the Fed," said Ian Shepherdson of High Frequency Economics, predicting the central bank will cut its target for a key interest rate by a quarter of a percentage point to 5% when it meets Sept. 18, but adding that it should cut rates half a point.

"This report does not fully reflect the market turmoil; worse to come," he said in an advisory to clients.

The Fed has held its target for the federal funds rate, what banks charge each other for overnight loans, at 5.25% for more than a year, to contain inflation. In recent months, as rising defaults among borrowers holding subprime mortgage loans — higher-priced loans to consumers with less than prime credit — have exploded into a more generalized credit crunch, the central bank has taken a number of actions. The Fed has pumped money into the financial system to relieve seized-up credit markets and cut the rate at which banks borrow directly from the Federal Reserve, the so-called discount window, to restore confidence to the markets.

Still, credit market problems persist. Tightening standards for mortgage lending threaten to worsen an already steep housing plunge. Economists worry that could broad effects on employment and on consumer spending, which accounts for two-thirds of the economy.

The Labor Department said average weekly earnings for production workers rose 0.3% in August to $591.50. During the past year, hourly and weekly earnings have risen 3.9%. Further, the number of people employed part-time for economic reasons was nearly 360,000 above a year ago.

How bad are the numbers? Economists had generally predicted job gains of around 100,000 during the month. And the Labor Department revised job gains for June and July downward by 81,000 jobs.

Steven Wood of Insight Economics points out that businesses have been creating only about 44,000 jobs a month the past three months. That compares with gains of 147,000 a month earlier in the year and average monthly job creation of nearly 190,000 in 2006.

"Job creation has been on a slowing trend over the past year, but the recent pace has been uncomfortably soft," Wood said, predicting the Fed later this month would be debating how deep to cut rates, not whether to cut them.

Manufacturing employment has fallen 215,000 the past year. Factory job declines went far beyond fallout from the housing sector in August, including auto plants, semicondcutors, wood products and furniture. Construction employment has fallen by 96,000 since its peak in September 2006, with job losses centered in housing.

Health care employment grew 35,000 in August, and restaurants added 24,000 jobs. Retailers saw little change. Financial services employment was flat during the month.

Another report Friday showed that inventories on U.S. wholesalers' shelves rose a smaller-than-expected 0.2% in July from June, as auto and electrical goods inventories declined, the weakest inventory rise since a December decline.

Inventories rose to $398.8 billion in July, the Commerce Department said.

Sales rose 0.1% to $359.1 billion, the weakest showing since January, as gains in auto and furniture sales offset declines in lumber and computer equipment sales.

The stock-to-sales ratio, a measure of how long it would take to deplete stocks at the current sales pace, held steady at 1.11, matching the lowest on record.