WASHINGTON, Sept 8: The world’s largest economy was hit with surprise job losses in August as a housing slump and a pullback in home construction triggered increased layoffs, a government report revealed on Friday.

The Labour Department said US employers unexpectedly shed 4,000 jobs in August, marking the first drop in payrolls since August of 2003.

Economists warned the job losses could worsen as banks and mortgage companies slash positions to fend off a broad credit crunch.

The unexpected decline in nonfarm payrolls caught Wall Street off guard, triggering sharp falls on major stock markets. Most economists had expected around 110,000 new jobs to be created in August.

The leading Dow Jones Industrial Average closed down a heavy 1.87 percent at 13,113.38 points as the job survey dented investor optimism.

The jobs numbers were about as disappointing as they could be, said Joel Naroff, chief economist at Naroff Economic Advisors.

The employment snapshot raises the odds that the Federal Reserve will slash borrowing costs at a policy meeting scheduled for Sept 18, partly as it suggests economic growth is slowing.

The brunt of the job losses tracked by the report, viewed as one of the best indicators of economic momentum, occurred in the manufacturing and construction industries.

Many home builders have layed off construction workers because of the housing downturn which shows no sign of improving anytime soon.

The national unemployment rate held steady at 4.6 percent despite the month’s job losses.

The Fed is coming under increasing pressure to slash its key short term federal funds interest rate, which has been anchored at 5.25 percent since June 2006, to bolster growth.

The numbers were obviously pretty weak. So I think in the context of what is going on in money markets, it solidifies our expectation of a 50 basis point cut by the Fed on Sept 18, said Ian Morris, chief US economist at HSBC North America in New York.

David Kotok, the chairman and chief executive officer of Cumberland Advisors, agreed that the Fed would likely move to cut rates at its upcoming rate meeting.

It is clear from this report and from the other reports on the labor markets that the employment situation in the United States is worsening and the pace is accelerating, Kotok said.

Job growth in the financial sector was flat last month. Analysts said the turbulence sweeping money markets has yet to impact the monthly job report, saying recent layoffs by banking and mortgage firms would be reflected in September and October.

Concern has mounted about the distressed housing market and the multitrillion dollar mortgage sector in recent weeks after several large banks and investment houses revealed hefty losses tied to mortgage-backed securities.

The losses have sparked a credit crunch as banks have tightened their lending standards and cut back mortgage business. Lehman Brothers announced 850 layoffs Thursday as it overhauls its mortgage operations.

Most economists expect the Fed to cut rates, but they are divided on the depth of a potential cut.

Stephen Gallagher, economist at Societe Generale, said he anticipates the Fed trimming rates by 25 basis points on September 18. Others, like Morris, are predicting a sharper 50 basis point reduction.--AFP