WASHINGTON — Hopes that the economy could shake off the sub-prime mortgage mess and dodge recession grew fainter Friday as the Labor Department reported that U.S. employers last month added the smallest number of new jobs in more than four years -- driving the unemployment rate to a two-year high of 5%.
Word that payrolls grew by only 18,000 jobs in December extended a string of negative economic news in recent weeks. Oil briefly touched $100 a barrel. Auto sales slipped to their lowest annual count in a decade. And an influential survey of U.S. manufacturing posted its weakest results in nearly five years.
Even exports, which are supposed to be one of the country's economic bright spots, stumbled. Sales of new homes and orders for big-ticket items fell short of analysts' expectations. Business equipment spending declined. And jobless benefit claims have been on the rise.
The economy may yet avert recession. But analysts say that economic activity in some states -- notably California, Nevada and Florida -- as well as substantial swaths of the Northeast corridor is probably already contracting.
"The economy is operating at stall speed," said Mark Zandi, chief economist of Moody's Economy.com, a research firm in West Chester, Pa. "Either something is going to revive it quickly or else we're going to get into a vicious cycle of declining spending and even weaker job growth."
The obvious "something" is further interest rate cuts by the Federal Reserve, but those could threaten renewed inflation, drive down the already weak dollar and even set the stage for another bubble such as the one now deflating in the housing market.
The new job data sent shock waves through the stock market. The Dow Jones industrial average fell 256.54 points, or 2%, to close at 12,800.18. In only three days of trading so far this year, the Dow has lost half of its gain for all of 2007.
The report also left analysts shaking their heads over how problems in a relatively obscure corner of the financial world -- the market for mortgages made to people with poor credit -- could erupt into such an economy-threatening event and could do so in such short order. Most economists barely made note of sub-prime mortgages six months ago.
"You look at the magnitude of the sub-prime problem, and it's just not that big relative to the size of the economy or the financial market," marveled David Wyss, chief economist at Standard & Poor's in New York.
Big or not, the December job report showed the marks of the sub-prime crisis and the housing slump. The construction industry, which had been growing at the start of 2007 as the home market continued to boom, shed 49,000 jobs in the last month of the year, more than half in residential building and specialty trades. Credit intermediation, which includes mortgage brokers and which was also booming at the start of last year, lost 7,000 positions in December.
But what was particularly disheartening about the report, analysts said, was how widespread the job losses were. For example, the retail sector, which normally adds jobs in December to accommodate holiday shoppers, gave up 24,000 positions last month. Manufacturing, which was thought to be in the midst of a turnaround because of an export boom, dropped 31,000 jobs.
The gains that offset these losses and accounted for what little job growth there was during the month were concentrated in just a few areas. Healthcare employers added 28,000 positions and food-service employers added 27,000. The combined growth last year in healthcare and food-service jobs equaled two-thirds of all private-sector job growth in 2007. The other growth area was government, which added 31,000 workers during the month, most of them teachers.
"There's nothing heartwarming about this report," said Neal Soss, chief economist at Credit Suisse Group Inc. in New York. "It confirms what economists have been worried about, which is a broad-based economic slowdown."
Indeed, a number of analysts raised their odds of the economy's slipping into recession in the wake of the release of Friday's job report. Standard & Poor's Wyss, for example, said he now put the chance of recession at 50%, up from his previous estimate of 40%.
Economists generally define a recession as a significant, broad-based decline in economic activity, usually lasting more than six months.
The Fed has already reacted to the signs of economic slowdown and fallout from the sub-prime mess by cutting its benchmark interest rate by a full percentage point to 4.25% since September. But officials at the central bank worry that they might not be able to cut too much more because some of them see signs of renewed inflation despite the slowdown in growth.