U.S. Payrolls Unexpectedly Drop First Time Since 2003


The U.S. economy unexpectedly lost jobs in August for the first time in four years, increasing speculation that the Federal Reserve will have to reduce interest rates to counter an economic slowdown.

Employers cut 4,000 workers from payrolls, compared with a revised gain of 68,000 in July that was smaller than previously reported, the Labor Department said today in Washington. The unemployment rate held at 4.6 percent as almost 600,000 people left the workforce.

"The recession risk has certainly increased,'' said Zach Pandl, an economist at Lehman Brothers Holdings Inc. in New York. "It definitely cements the case for a rate cut at the next Fed meeting.''

The drop in jobs is the clearest sign yet that the deepening housing recession and turmoil in credit markets are hurting the wider economy. Payrolls are one of the main factors, along with sales, incomes and production, that help determine the starting point of economic contractions, and today's report may raise the odds the Fed reduces rates even before the Sept. 18 meeting.

Treasuries rose and stock index futures fell. The yield on the benchmark two-year note slid below 4 percent, indicating traders anticipate a series of Fed rate cuts. The central bank's current target rate is 5.25 percent. Futures on the Standard & Poor's 500 index fell 1 percent to 1,465 at 8:46 a.m. in New York.


Bloomberg
9/7/2007 6:14:51 AM