A surprise decline in the number of US jobs provided new evidence that the world's largest economy is slowing, as the effects of falling house prices and a crisis in the global financial markets begin to bleed into the rest of the real economy.
The nervously-awaited August employment data, released by the US government yesterday, recorded 4,000 fewer positions in August – the first decline since 2003, when the US economy was emerging from recession. The data prompted a sharp fall in the value of the dollar, and a crescendo of calls for an interest rate cut by the Federal Reserve.
"It's dreadful," said Michael Metz, the chief investment strategist for Oppenheimer & Co. "It shows the so-called support for the economy from rising employment is rapidly eroding and to me it seems almost inevitable we are heading for recession."
Employment fell across most of the economy, with the manufacturing sector and the government workforce scoring unexpectedly steep declines. Economists had largely predicted the 22,000 job losses recorded in the construction industry, which has been scaling back as a result of the housing market slowdown.
Compounding the disappointment, the Labor Department also revised down its estimates for hiring in June and July by a total of 81,000.
The Dow Jones Industrial Average closed 250 points lower at 13,113.4, and the data dragged down other world stock markets. In London, the FTSE 100 closed at 6,191, off 122.1. Traders saw a gloomy prognosis everywhere, from the fact that planned lay-offs in the mortgage industry are yet to show in the data all the way to the fabled "hemline index" which suggests that stock markets go up and down with the length of skirts and dresses unveiled in the latest fashion shows. The spring ranges on show at New York fashion week: hemlines to the floor.
The dollar hit a 15-year low against a basket of other major currencies, and lost almost half a cent to stand at $2.028 to the British pound. Investors sought out government bonds as a safe haven, and the yield on the benchmark two-year Treasury fell below 4 per cent.
The employment data gives the Federal Reserve cover for an interest rate cut, its first in more than four years, when its open markets committee meets on 18 September, and traders believe the debate is now over whether to move the normal 25 basis points or double that.
Ben Bernanke, the chairman, had previously been reluctant to cut rates simply to bail out financial markets, but consistently said he was concerned the credit market turmoil could damage economic growth.
His predecessor at the Fed, Alan Greenspan, characterised the current crisis as the bursting of a bubble in credit, telling academics in Washington that "the human race has never found a way to confront bubbles".
He said: "The behaviour in what we are observing in the last seven weeks is identical in many respects to what we saw in 1998, what we saw in the stock-market crash of 1987, and I suspect what we saw in the land-boom collapse of 1837."
Also yesterday, the managing director of the International Monetary Fund, Rodrigo Rato, signalled that it was likely to cut its forecasts for world growth as a result of the credit market crisis and the problems in the US mortgage market.
"The revisions are likely to be largest for the United States, but we may also see some impact in the euro area and Japan" he said. "This is a serious crisis that will certainly have effects in 2007 and 2008."
Mr Rato said that protracted restrictions on lending could spill over into emerging markets through increased credit spreads and lower capital inflows, and he promised that the credit crisis would top the agenda at the forthcoming annual meeting of the IMF.