In January, revised data showed a loss of 22,000 positions, compared with an earlier estimate of a drop of 17,000. February's loss was the biggest since March 2003, at the start of the war in Iraq, and a major disappointment for analysts expecting a gain of 25,000 jobs.
For some, the report confirms the US is in recession. "The payrolls report had recession written all over it," said Avery Shenfeld, senior economist at CIBC World Markets. "It's nearly unheard of to see these numbers outside of recession." The unemployment rate, which is based on a separate survey, fell to 4.8 percent from 4.9 percent a month earlier, the Labour Department said.
This is attributed to people dropping out of the workforce, after being unable to find jobs, according to officials. The labour force available for work fell by 450,000 and the participation rate slipped 0.2 percentage points. The report was released minutes after the Fed announced actions to pump more liquidity into the distressed banking system, which is reeling from a horrific slump in housing and tighter credit, in a further threat to economic growth.
Details in the payrolls report showed an economy quickly losing steam. Private-sector payrolls fell 101,000, in a third month of decline, including a loss of 52,000 jobs in manufacturing and 39,000 in construction.
The main gains were in government, which added 38,000 jobs. Overall, the report signalled a sharply weaker-than-expected performance for the US economy, which according to analysts, needs to add at least 100,000 jobs per month to keep pace with new labour market entrants.
"The weakness in housing is starting to catch up to the rest of the economy," said Shenfeld. The US economy expanded at an anaemic 0.6 percent pace in the fourth quarter of 2007 and many analysts say they expect the first quarter to show declining activity for the first time since the recession of 2001.
Following the latest data, "The question appears no longer to be are we going into a recession but how long and deep it will be," said Joel Naroff of Naroff Economic Advisors. In a sign that inflation pressures remained present, the report said average hourly earnings rose 0.3 percent in February and 3.7 percent year-over-year. The Federal Reserve has been cutting interest rates aggressively since September in an effort to reignite growth in an economy battered by the worst housing market slump in decades and related troubles in the finance sector.
Ahead of the Labour Department announcement, the Fed unveiled two initiatives aimed at easing a growing credit squeeze that would make 200 billion dollars available to the strapped financial market. The Fed said it was raising the amounts available in its Term Auction Facility program in which banks bid for loans to a combined 100 billion dollars this month. It also launched a series of term repurchase transactions expected to reach 100 billion dollars to pump more liquidity into the banking system. "This was a good news-bad news story," said Scott Brown, economist at Raymond James amp; Co. "It's good the Fed is coming to the rescue, the bad news is that they have to." Brown said the main worry is that the economy may enter a downward spiral with "adverse feedback loops" where bad news feeds on itself and causes consumers and businesses to retrench further.
"The Fed will act with all its power to avoid a meltdown contagion that leads to a depression," said David Kotok at Cumberland Advisors. "And they know that contagion must be arrested and that can only be done with huge offsetting liquidity injections." A number of economists say the rate cuts by the Fed and a 168-billion-dollar stimulus package approved by Congress will help stabilise the economy by mid-year. "We're looking for a first-half recession followed by a recovery in the third quarter," Shenfeld said.