By Glenn Somerville
WASHINGTON (Reuters) - U.S. employers cut 159,000 jobs last month, a ninth straight monthly reduction and the deepest in 5-1/2 years, the government said in a report on Friday that suggested the economy may be in recession.
The Labor Department report showed 760,000 jobs lost so far in 2008. The unemployment rate in September held at a five-year high of 6.1 percent as 121,000 people quit the workforce.
The bleak hiring outlook and a separate report showing a sluggish service sector that barely grew last month added to a string of negative news recently, including weak personal income and spending, declines in manufacturing activity and declining factory orders and shipments.
"The problems of Wall Street have now hit Main Street with full force," the chairman of the Joint Economic Committee, Sen. Charles Schumer of New York, said ahead of a U.S. House of Representatives vote of approval for a $700 billion rescue package for banks and other financial firms.
The proposal, passed earlier this week by the Senate, will enable Treasury to buy bad assets including mortgage-related ones from financial firms in hope that will persuade them to resume normal lending and ease a credit market freeze.
Treasury Secretary Henry Paulson praised lawmakers for passing what he called "key and critical" measures to help protect or at least slow losses of U.S. jobs and savings.
Treasury will use auctions and other measures to take the illiquid assets from banks, holding them until it can hopefully resell them and possibly profit on it. Paulson said Treasury will spell out how it intends to act in coming days.
Stock prices that had been solidly higher ahead of the vote flattened out after the vote as some investors sold for quick profits. U.S. Treasury debt prices remained broadly lower and the dollar dropped against the euro on the prospect of huge volumes of toxic debt ending up on the government's books.
The darkening jobs picture focused lawmakers' attention on the urgency of passing the financial rescue package to try to stabilize markets as a U.S.-originated crisis increasingly washed over into Europe and other foreign centers.
A BAD HAND DEALT
"We were dealt a bad hand. We made the most of it. I think the American people will benefit from it," House Speaker Nancy Pelosi said after the vote, which cleared the way for the legislation to be signed into law by President George W. Bush.
The economy will remain under strain for a protracted period, analysts said, with all the risks to the downside unless confidence can be restored to markets and to consumers.
White House spokesman Tony Fratto said the job report was disappointing but not surprising. "Everyone should understand that it will take some time for our economy to recover from the housing correction, elevated energy prices and the credit crisis."
September's job losses were much more severe than predicted by Wall Street economists surveyed by Reuters, who had forecast 100,000 jobs would be cut.
Separately, the Institute for Supply Management said its index of non-manufacturing activity eased slightly to 50.2 in September from 50.6 in August. A reading over 50 implies growth, so last month's soft reading showed the sector was virtually stalled.
Some analysts said the economy may be headed into a potentially severe slump, especially with a total of 760,000 jobs having disappeared so far this year.
"We've seen weaker data in history, but these look pretty decisively to be the beginning of something worse," said Pierre Ellis, senior economist with Decision Economics Inc in New York, adding it might make the Federal Reserve more inclined to cut interest rates despite its concern over inflation.
Roger Kubarych, chief U.S. economist for UniCredit Global research in New York, said he felt that Fed action was vital.
LOOKING TO THE FED
"As a result of a series of ugly economic reports and a worrying widening of the financial crisis, we conclude that the Federal Reserve will move quickly to buttress the emergency financial assistance program with a reduction of the federal funds rate by 50 basis points to 1-1/2 percent this month," Kubarych said.
The Fed's policy-setting Federal Open Market Committee is next scheduled to meet October 28-29 but there has been speculation that central bankers could coordinate a global rate cut if financial markets continue to be wracked by turmoil.
The job cuts in September follow revised losses of 73,000 jobs in August and 67,000 in July and show the decline in employment is accelerating. Some 51,000 manufacturing jobs were lost last month on top of 56,000 cut in August, the 27th straight month in which manufacturers slashed their payrolls.
Job cuts were nearly across the board in September in every major category with the exception of government, which added 9,000 jobs.
The average work week in manufacturing industries was the lowest in three years at 40.7 hours.
Overall hours of work in all industries slipped to 33.6 a week in September from 33.7 in August -- the lowest since November 2004.
Hurricane Ike, which hit the Gulf coast, and a strike at aircraft maker Boeing Co. did not impact the data because the employees affected were on payrolls for at least part of the Labor Department's survey period.
(Reporting by Glenn Somerville, editing by Neil Stempleman)
