Job cuts raise fear of recession in US

Saturday, September 8, 2007 (Washington):

For the first time in four years, American employers have cut jobs, raising new fears that a deep housing slump and a painful credit crunch could push the economy into a recession.

Pressure is building on the Federal Reserve to lower interest rates. Many economists predict the deteriorating employment climate will lead to a rate cut on September 18.

A report released Friday by the Labor Department showed the nation's payrolls shrank by 4,000 in August. It was the first decline in jobs since August 2003. Payrolls fell by 42,000 at that time as the job market was still struggling to recover from the 2001 recession.

The unemployment rate held steady last month at 4.6 per cent, mainly because hundreds of thousands of people left the job market.

Job losses in construction, manufacturing, transportation and government swamped gains in education and health care, leisure and hospitality and retail. Employment in financial services was flat.

Employers are hiring less because uncertainty about the country's economic health is growing. The ailing housing market and credit problems that have unhinged Wall Street are main culprits behind businesses' fresh sense of caution.

Federal Reserve Chairman Ben Bernanke, in a speech last week, said the Fed stands ready to do all that is needed to keep the six-year-old economic expansion alive.

Credit problems

Economists increasingly believe the Fed will cut a key interest rate, now at 5.25 per cent, by at least one-quarter percentage point at the September meeting. The Fed has not lowered this rate in four years.

Average hourly earnings rose to $17.50 in August, up 0.3 per cent from July. Over the past 12 months, wages increased 3.9 per cent. Wage growth supports consumer spending, a major ingredient for a healthy economy.

But an eruption of credit problems that had started with high-risk mortgages and has spread has added to stresses faced by employers and the economy at large.

Credit is the economy's life blood. If it becomes more difficult to obtain, people might tighten their belts and companies might spend and invest less, including cutting back on hiring. That would crimp overall economic activity.

Under a worst-case scenario, the economy could slip into a recession this year. Earlier this year, former Fed chief Alan Greenspan had put the odds at one in three.