US private sector employment falls for first time in five years

Confirmation that private sector employment in the US fell for the first time in almost five years this month came with the latest analysis of the American jobs market.

Yesterday's report follows a series of similarly pessimistic surveys and is bad news for the already enfeebled real estate market, reeling from a slump in prices and the spectacular collapse of the sub-prime sector. It suggests that the vicious cycle of woe is likely to continue as job insecurity deflates the housing market still further, pushing prices lower, default rates higher, intensifying the credit crunch and dragging the world's largest economy deeper into decline. Even the Federal Reserve's dramatic cuts in interest rates seem to have done little to restore confidence.

Following last month's US government labour market report indicating falling employment levels, the private sector ADP Employer Services report said American companies unexpectedly cut their workforces in February, the first decline since 2003. The decrease of 23,000 jobs followed a revised gain of 119,000 in January. Economists expected that the ADP report would show an increase in employment of 18,000. Workers in mortgage lending, home construction and other housing-related industries have been among the worst affected. Consumer spending is slowing as the labour market weakens and higher energy and food prices leave Americans with less disposable income , the Commerce Department added.

There was more bad news from the Federal Reserve's so-called Beige Book report, which said the US had seen an economic slowdown across all regions since January. Housing, manufacturing and retail activity had all cooled since the start of the year. The report also cited rising mat-erials and energy prices, highlighting the challenge of inflation.

Better news came from elsewhere in the economy. US service industries contracted less than forecast last month, according to the US Institute for Supply Management's non-manufacturing index. The index rose to 49.3 from a record low of 44.6 in January, with 50 as the dividing line between expansion and contraction.

On Wall Street equities rallied and Treasury notes retreated after the data was digested. Investors expect the Federal Reserve will lower the benchmark interest rate again by the next scheduled meeting on 18 March, and see a chance of a 0.75 percentage point cut, to 2.25 per cent. Senior Fed officials have tacitly admitted that they fear a recession more than inflation. Were it not for a relatively strong improvement in the US trade position as a result of the rapidly depreciating dollar, the US economy would have shrunk in the last quarter of 2007. The doyen of US investment, Warren Buffett, pronounced America to be in recession this week.

Julian Jessop of Capital Economics said: "The real danger is falling house prices. The 20-city index fell at an annualised rate of 16.2 per cent between August and November. The more house prices fall, the more risk there is of a complete consumer capitulation."