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Alarm over US jobs fall

The US economy was surprisingly weak in April, according to the first published indicator for the month, writes Diane Coyle. The number of jobs fell by 9,000, the only drop in more than two years, confounding expectations of a healthy increase.

Yesterday's figures confirmed that the recovery is slowing and could even point to the risk of a recession, according to some analysts. The Federal Reserve Board is now expected to leave interest rates unchanged for the time being and perhaps even reduce them in the summer.

The dollar reacted by dipping to DM1.36, while Treasury bonds rallied to their best level since before the bond market crash in March 1994. The yield on long-term bonds fell to 7.09 per cent.

The fall in employment compared to an average rise of more than 200,000 in recent months. The US Labor Department cautioned that seasonal and special factors had distorted the headline figure. Easter and Passover fell during the period when firms were surveyed this year, unlike last year. There had also been a shopworkers' strike on the West Coast in April, trimming the jobs total by an estimated 26,000.

However, other figures unaffected by these influences emphasised the unexpected weakness in the labour market. March's employment level was revised down by 6,000 to 177,000. The unemployment rate rose from 5.5 to 5.8 per cent.

In manufacturing industry hours worked and overtime hours both declined. Other sectors shared the misery. There were 20,000 fewer construction jobs, and service sector employment rose by 42,000, compared with 120,000 in March.

Some Wall Street economists thought the employment report highlighted the risk of the US diving into a recession rather than gliding in to the desired "soft landing".

Lacy Hunt, chief economist at HSBC Markets in New York, said: "It looks like the economy has hit a wall, and the issue now is whether we can avoid a downturn." John Lonski, senior economist at Moody's credit rating agency, said the risk of a recession could not be dismissed.

Others thought it was too early to draw such a firm conclusion. Chris Iggo at Chase Manhattan said: "The economy is still on track for a soft landing." He added that hourly earnings had risen by a worrying 0.6 per cent in April. Most economists thought the Fed would be happy to leave interest rates unchanged when its policy committee meets on 23 May.