AFP

WHATEVER your opinion of the health of America's economy was a couple of days ago, it should now be a lot gloomier. The monthly jobs figures for August, released on Friday September 7th, were worse, far worse, than anyone expected. The economy lost 4000 jobs last month, the first monthly loss of jobs since August 2003. Already jittery financial markets headed down. The Dow Jones Industrial Average fell almost 250 points or 1.87%. The dollar sank at the prospect of weaker economy and lower interest rates.

The monthly employment figures tend to have an outsize impact on financial markets. But this time Wall Street's reaction seemed justified. Not only were the overall figures far worse than expected—Wall Street's seers had forecast some 100,000 new jobs—but revisions to prior months suggested that the job market has been weakening for a while. The new figures suggest that over the past three months the economy, on average, created 44,000 jobs a month, far fewer than are necessary to keep the jobless rate stable, and well below the monthly job growth of 147,000 between January and May. The unemployment rate, which comes from a different set of figures to the jobs numbers, remained at 4.6%—but only because the number of people who described themselves as being in the labour force fell sharply.

There are some reasons to believe that this report exaggerates the bad news. Government jobs, for instance, fell for the third month in a row. That is extremely unusual and may well be made up in September's figures. It is not unheard of for monthly payrolls to fall for a month, and then rebound. But the basic message—that America's labour market was weakening well before the recent financial turmoil—is hard to deny. (The payroll figures are based on surveys conducted in the middle of each month. Thus August's figures do not reflect the full brunt of the past few weeks' credit crunch).

For months, solid job growth, rising incomes and low unemployment have been the foundation for an optimistic assessment of the economy's prospects. With jobs plentiful, the argument went, even a sharp housing bust need not derail the broader economy. That foundation may now be crumbling. There is little doubt that the housing market was worsening, once again, before the August turmoil. The pace of new home construction plunged in July, while the stock of unsold homes rose to a 16-year high. Now it seems that the labour market was weakening too. A weaker labour market, in turn, is likely to worsen the housing bust as more people find it hard to pay their mortgages. Pile a sharp tightening in credit conditions on top and recession seems all too plausible.

That spectre is why it is all but certain that the Federal Reserve will cut the federal funds rate, its benchmark short-term interest rate, on September 18th. The speculation now is whether the cut will be a modest quarter-point, bringing the funds rate down to 5%, or a more aggressive half percentage point cut. Unfortunately, if the employment figures are a harbinger of what is to come, it may already be too late to stave off a nasty slowdown.