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Last Updated: Friday, 4 January 2008, 21:56 GMT
US shares slump on work worries
US construction worker
The US economy is expected to slow this year
US shares fell sharply on Friday after the country's unemployment rate rose to a two-year high in December, raising fears about a possible recession.

The Dow Jones index slumped 256.54 points, 2% to close at 12,800.18 while the tech-heavy Nasdaq plunged 98.03 points, 3.8% to 2,504.65.

The US Labor Department said employers added 18,000 jobs to their payrolls, far below economists' forecasts.

The data is likely to cement concerns that the US economy is cooling sharply.

Observers said that the markets were also digesting news that the Federal Reserve was to increase the amount of money it was to auction off to banks, to help ease the credit squeeze.

It has said that $60bn would be available, up from the $40bn announced last month.

The plunge in US shares had an impact in Europe, with London's FTSE 100 index closing 2% lower and key markets in France and Germany also down heavily.

Economic uncertainty

It had been expected that about 70,000 new jobs would have been created in the month, after November's 115,000 figure.

The unemployment rate rose to 5.0%, its highest since November 2005 and up from 4.7% in November.

The data will also raise expectations of further cuts in interest rates by the US Federal Reserve.

The health of the US job market will in part determine whether the economy will weather a slump in the housing market and a squeeze on credit.

Businesses appear to be reluctant to add new workers given uncertainties in the economy
Richard Yamarone, Argus Research

"The unemployment rate moved up in a shocking way, and that's sort of political dynamite that may make the Fed more prone to easing than otherwise," said Pierre Ellis of Decision Economics.

The pace of job creation was at its slowest since August 2003.

Analysts said that the poor figures could be down to a number of factors, including poor weather.

"Businesses appear to be reluctant to add new workers given uncertainties in the economy," said Richard Yamarone of Argus Research. "But there's also a chance the weakness was overwhelmingly due to inclement weather during the survey week. Most of the nation was iced over."

Rate outlook

The non-farm payrolls data includes both private and public sector jobs.

More jobs were created in the service sector such as healthcare, but jobs were lost in construction and manufacturing, the Labor Department said.

The data raised some expectations that the US central bank could cut interest rates by a more aggressive half a percentage point when it meets to decide monetary policy on 29-30 January.

Financial markets had been expecting the Federal Reserve to cut by a quarter point from 4.25% to 4%.

"While we continue to expect a 25 basis point rate cut at the end of January, the combination of poor payroll data and the increase in the (Federal reserve) auction sizes suggest that the odds of a 50 basis point rate cut are rising," said Lehman Brothers analyst, Drew Matus.

MARKET DATA - 11:37 UK

FTSE 100
5428.78up
22.84 0.42%
Dax
5732.06up
18.55 0.32%
Cac 40
3783.91up
14.37 0.38%
Dow Jones
10403.79up
78.53 0.76%
Nasdaq
2273.57up
35.31 1.58%
Data delayed by at least 15 minutes


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