Private jobs, services slump show recession toll

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By Burton Frierson

NEW YORK (Reuters) - Private employers cut 250,000 jobs in November, an unexpectedly large number and the biggest in seven years, while the service sector, which powers most of the economy, posted its worst slump on record.

Wednesday's reports were the latest signs that the slide in the U.S. job market is nowhere near bottom and suggested Friday's government payrolls report could exceed current expectations for 320,000 job losses in November.

The Institute for Supply Management said its index of non-manufacturing businesses dropped to the lowest in the survey's 11-year history, while a record low in its employment gauge raised worries about the payrolls report.

"This is consistent with payrolls falling by about 500,000; let's hope it is very wrong," said Ian Shepherdson, chief U.S. economist at High Frequency Economics in Valhalla, New York.

ADP Employer Services, a major payroll servicer for the private sector, said private companies cut jobs for a fourth straight month in November.

The Federal Reserve reported economic activity had weakened across the United States since early October, while price pressures eased with declines in retail and energy prices.

The Fed's Beige Book summary portrayed grim conditions in most areas of economic activity and noted that labor markets weakened as firms in many districts reported accelerating layoffs. Wage pressures were largely subdued, the Fed added.

The ISM non-manufacturing index came in at 37.3, below October's already weak 44.4 and well below the 50 level that separates expansion from contraction. It was also much worse than the median forecast of 42.0 expected in a Reuters poll.

This was consistent with global trends, with the euro zone's services economy falling deeper into recession last month than initially thought. That will add pressure on the European Central Bank to cut interest rates on Thursday by more than the 50 basis points expected.

Every major category in the ISM survey hit a record low, particularly bad news for the United States, where 80 percent of economic activity is driven by the service sector, including businesses such as banks, airlines, hotels and restaurants.

The data reflected the heavy constraints on the economy as the U.S. recession enters its second year, the worst financial crisis in a generation.

"The severe damage to the service industry is another indication of the extraordinary force of this recession," said Pierre Ellis, senior economist at Decision Economics in New York.

U.S. stocks <.DJI> were higher, recovering from earlier losses in the wake of the surprisingly weak ISM. U.S. Treasury debt prices were mixed, while the dollar slipped against the yen.

NOT A RAY OF LIGHT

The ADP data was the first reading of the job market since the U.S. economy was formally declared on Monday to have entered recession.

The 250,000 jobs reported by ADP to have been lost last month significantly exceeded the 200,000 median forecast of 24 economists polled by Reuters.

As in the ISM data, there was little in the ADP report, jointly developed with Macroeconomic Advisers LLC, to spur optimism.

"It's impossible to find any ray of light here," said Joel Prakken, chairman of Macroeconomic Advisers in St. Louis.

Prakken said Wednesday's ADP data was consistent with a drop of 300,000 or more jobs in the November payrolls report and added that employment declines of 300,000 to 500,000 were possible in the coming months.

ADP revised October's private job cuts upward to 179,000 from the originally reported loss of 157,000.

The National Bureau of Economic Research, the official arbiter of economic cycles, said on Monday that the contraction began in December 2007.

The only positive news in Wednesday's slew of data was that interest rates on U.S. mortgage loans fell to an average 5.47 percent last week, the lowest in more than three years, and mortgage applications surged by a record amount.

The jump in mortgage activity was an indication that a new program by the Fed -- the U.S. central bank -- to buy $500 billion of mortgage-backed securities from home-financing facilitators Fannie Mae , Freddie Mac and Ginnie Mae was helping bring down home loan costs.

Costs had stayed stubbornly high, impeding a recovery in the slumping U.S. housing market.

However, in another signal that U.S. employers were making do with fewer workers, non-farm productivity was slightly stronger than initially forecast in the third quarter. Still the pace of growth remained the slowest this year as output declined the most in seven years, the Labor Department said.

(Additional reporting by Lucia Mutikani in Washington and Julie Haviv, Vivianne Rodrigues and Ellen Freilich in New York; Editing by James Dalgleish)

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