Employers cut payrolls by 4,000 in August

updated 12:40 p.m. ET Sept. 7, 2007

WASHINGTON - Employers sliced payrolls by 4,000 jobs in August, the first such decline in four years and a stark sign that a painful credit crunch that has unnerved Wall Street is putting a strain on the national economy.

The latest snapshot of the employment climate, released by the Labor Department on Friday, also showed that the unemployment rate held steady at 4.6 percent, mainly because hundreds of thousands of people left the work force for any number of reasons.

The surprisingly weak report provides the Federal Reserve with a reason to lower interest rates when it meets next on Sept. 18.

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. The weakness in payrolls reflected fallout from a deepening housing slump, a credit crisis and financial turbulence that has made businesses more cautious in their hiring.

“I think a lot of businesses are moving to the sidelines to wait and see how things shake out,” said Ken Mayland, president of ClearView Economics.

Economists were expecting a much stronger report. They were forecasting payrolls to grow by 110,000.

The drop of 4,000 jobs in August was the first decline since August 2003. Payrolls fell by 42,000 at that time as the job market was still struggling to recover from the 2001 recession.

Federal Reserve Chairman Ben Bernanke, in a speech last week, said the Fed stands ready to do all that is needed to keep the credit crunch that has rocked Wall Street from damaging the economy.

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

“Clearly the economy is struggling, and this is the kind of evidence that really makes a strong case for a Fed easing move,” Mayland said.

Rep. Barney Frank, D-Mass., chairman of the House Financial Services Committee, called the employment report “deeply troubling” and urged the Fed to lower rates. “A strong response is required — specifically a meaningful interest rate cut,” he said.

Those with jobs, however, did see modest wage gains.

Average hourly earnings rose to $17.50 in August, a 0.3 percent increase from July. That matched economists’ forecasts. Over the past 12 months, wages are up 3.9 percent. Wage growth supports consumer spending, a major ingredient for a healthy economy. If the job markets continues to lose steam, however, wage growth will eventually slow, too, economists said.

The modest wage growth could ease inflation fears, giving the Fed more leeway to cut interest rates.

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