The dollar tumbled and bond and stock markets plunged after the US government announced a tiny 32,000 increase in new jobs last month.
The news was a bad pre-election blow for President Bush, reinforcing fears that the current recovery may be running out of steam. The news from the Labor Department stunned economists, who were expecting a surge of 220,000 or more in non-farm payrolls. Instead the real July figure was the smallest monthly increase of 2004.
Compounding the disappointment, the government also revised downward job-creation figures for the two previous months, May and June, by a combined 61,000.
There was one small consolation for the White House - a drop in the headline rate of unemployment to 5.5 per cent from 5.6 per cent in June. But this statistic is considered a less accurate measure of the jobs market that business payroll trends.
The economist Ken Mayland, the president of ClearView Economics, said: "Employers got cold feet. They just don't have the confidence in the economy we need to sustain the kind of economic growth that we've seen."
The dismal unemployment report, which follows other signs the economy may be slowing, could cause the Federal Reserve to moderate its expected schedule for interest rate increases over the rest of the year.
Most analysts were still confident last night that the Federal Open Market Committee, the central bank's key policy making unit, will push up its key short-term federal funds rate by 25 basis points at its next meeting on Tuesday, bringing the rate to 1.50 per cent. But if growth continues to weaken, further expected increases before the end of 2004 might be in doubt.
In his most recent testimony on Capitol Hill, the Fed chairman Alan Greenspan was confident the economy would soon work its way through the rough patch, caused by higher oil and slowing growth in personal income.
Despite a disappointing 3 per cent expansion in the second quarter, according to provisional figures from the Commerce Department last week, the latest Fed forecast moreover anticipates GDP growth of between 4.5 per cent and 4.75 per cent for 2004 as a whole. This would be the best year-on-year growth since the mid-1980s.
But doubts were increased by a surprise 0.7 per cent drop in consumer spending in June, after nine consecutive monthly increases.
Leading economic indicators are also starting to point downwards, undermining Mr Bush's boast that his tax cuts, combined with the lowest interest rates in 45 years, have propelled the US on to a solid growth path.
But it is the employment figures that spell the worst trouble for the White House. Some of the biggest factory job losses have been in "rustbelt" states of the North-east and Midwest, among the most closely contested poll battlegrounds.
They include Michigan, Pennsylvania, Missouri and, above all, Ohio, without which no Republican has ever been elected president.
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