Fears over US economy return after slowdown in jobs market

Worries that spending cuts and higher taxes are hitting employment prospects

New York

A sudden, sharp slowdown in the pace at which American employers are adding jobs revived concerns about the world's largest economy yesterday, with fears growing about the impact government spending cuts and higher taxes are having on the labour market.

Figures from the US Labour Department showed that employers had added just 88,000 jobs last month, the slowest pace in nine months. That was less than half of what private economists had predicted. On average, they had pencilled in a rise of around 200,000 jobs.

While the jobless rate fell by one-tenth of a percentage point to 7.6 per cent last month, that was mostly because of people dropping out of the labour force.

The slim gains in March came exclusively from the private sector, which added 95,000 jobs, while government payrolls slumped by 7,000.

Particularly worrying was the fact that the decline in government payrolls was mostly down to cuts at the US Postal Service, which is struggling financially. That means more reductions are likely in the coming months, as the so-called sequester of billions of dollars in spending cuts takes full effect. The package has not affected the Postal Service.

In the private sector, retailers cut more than 24,000 jobs in March, suggesting caution in America's malls and shopping centres as higher taxes weigh on consumers.

Construction companies, meanwhile, added 18,000 jobs last month, with the sector continuing to show strength, partly as a result of the massive stimulus program put in place by the US Federal Reserve.

Those searching for a silver lining found two: in the upward revisions to the figures for January and February. The Labour Department said 61,000 more jobs had been added over the two-month period than previously estimated. The figure for January now stands at 148,000, while that for February was revised up to 268,000.

The figures led to falls in US stocks during morning trading. However, the declines were not particularly severe, something that could be attributed to the view that the weak jobs report would only encourage the Federal Reserve to stick with its stimulus programme for the near future. Currently, the central bank is buying around $85bn (£55bn) of mortgage and government-bonds to support the economy.

Although some senior central banks figures have recently raised the possibility of a pullback in the programme, the weak jobs data is likely to support the case of those who want the Federal Reserve to stay the course, at least until there is a marked improvement in the economic picture.

Winding down the stimulus programme too soon could trigger a slump in the wider economy.

"The recent discussions about the Fed backing off from its quantitative easing has been premature," Russell Price, a senior economist at Ameriprise Financial Services, said.

Some economists said the March jobs figures were just confirmation of the fact that the underlying picture remained weak, despite the optimism sparked in some quarters by the positive reports for January and February. At the time, many had viewed the reports as evidence that the recovery was finally on a firm footing.

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