Weak Jobs Report Fuels Worries About Recession

Hiring practically stalled in December, driving the nation's unemployment rate up to a two-year high of 5 percent and fanning fears of a recession.

Last month, employers added the fewest new jobs to their payrolls in more than four years, said the jobs report released Friday by the Labor Department. The report also showed that employment conditions are deteriorating, strained by a housing slump and credit crunch that are sapping economic strength.

The unemployment rate jumped from 4.7 percent in November to 5 percent in December, the highest since November 2005 after the Gulf Coast hurricanes dealt the country a mighty blow.

Payrolls--both private employers and government--grew by just 18,000 last month, the worst showing since August 2003, when the economy suffered job losses as it struggled to recover from the 2001 recession.

The December employment picture was much weaker than economists were expecting. They were forecasting the unemployment rate to bump up to 4.8 percent and for employers to add around 70,000 jobs to their payrolls.

In a separate report, growth in the U.S. service sector fell slightly in December. The Institute for Supply Management's services index fell to 53.9 last month from 54.1 in November, above economists' median forecast in a Reuters poll of 53.5.

A reading above 50 indicates expansion; a result below 50 implies contraction.

The services sector represents about 80 percent of U.S. economic activity, including businesses such as banks, airlines, hotels and restaurants.

Employers Grow Cautious

Employers have grown cautious as they try to cope with fallout from housing and credit problems and rising uncertainty about how the economy will fare in the months ahead. Galloping energy prices and bad weather in some parts of the country also probably figured into the weak job figures.

Manufacturers, construction companies, financial services all cut jobs in December - casualties of the housing slump. Retailers also sliced jobs.

The government added 31,000 jobs in December, while private employers actually cut payrolls by 13,000, underscoring the weakness.

For all of 2007, the unemployment rate averaged 4.6 percent, the same as last year.

The 5 percent rate is relatively low by historical standards. In the recession of the early 1980s, for example, the jobless rate reached double-digit levels.

Nevertheless, with the economy losing momentum, the White House and some economists at the Federal Reserve predict that the jobless rate will average 4.9 percent this year.

The health of the nation's job market is a critical factor in determining whether the economy will survive the stresses from housing and harder-to-get credit. The positive forces of job and wage growth have helped to cushion individuals from all the negative forces in the economy. The big worry is that people will clamp down on their spending and businesses will put a lid on investment and hiring, throwing the economy into a tailspin.

Average hourly earnings for jobholders rose to 17.71 in December, a 0.4 percent increase from November. Economists were forecasting a modest 0.3 percent gain. For all of 2007, wages increased 3.7 percent, down from a 4.3 percent gain in 2006.

Energy Prices Hurt

High energy prices, though, probably made some workers feel like their paychecks aren't stretching as far as they would like.

To fend off the possibility of a recession, the Federal Reserve cut a key interest rate three times last year. Policymakers are expected to lower rates again when they later this month.

The Fed's job of keeping the economy expanding and inflation under control, however, is becoming more complicated.

Oil prices briefly marched past $100 a barrel this week. High energy prices are a double-edged sword and they can sap economic growth and also can spread inflation throughout the economy if they cause a rise in the price of other goods and services.

Problems in the economy have elevated fears about a recession. The housing and mortgage markets have melted down. Home foreclosures have soared to record highs and financial companies have wracked up billions of dollars worth of losses from bad mortgage investments. Credit problems have made it difficult for people to finance big-ticket purchases and for companies to expand operations and boost hiring.

With the odds of a recession growing, President Bush is exploring a package to stimulate the economy. The president, who has been coping with low marks for his handling of the economy, isn't expected to make any decisions until later this month; He delivers his State of the Union address to the country on Jan. 28.

Many analysts believe the economy slowed sharply in the final three months of this year to a pace of around 1.5 percent or less. Growth in the January-to-March period also is expected to be weak. Alan Greenspan, former chairman of the Federal Reserve, recently warned that the economy is "getting close to stall speed."

The White House and the Democratic-controlled Congress blamed each other for not doing enough to stem the fallout related to the housing and credit debacles.

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