WASHINGTON -- U.S. recession fears mounted Friday as employment fell in February at its fastest rate in five years, suggesting that the housing and credit crunch is gripping the broader economy.

The data further cemented Wall Street expectations for additional Federal Reserve rate cuts when officials meet in less than two weeks and in the months that follow. Financial markets even raised their already aggressive rate-cut forecasts in the wake of the report.

The unemployment rate, which is calculated using a separate survey of households, fell 0.1 percentage point to 4.8%. But that isn't a reflection of economic strength. The drop instead was triggered by a 450,000 decline in the size of the labor force, not a rise in employment.

"A terrible report" that signals "no support at all now for consumer spending growth," said MFR Inc. economist Joshua Shapiro in a research note.

Average hourly earnings increased $0.05, or 0.3%, to $17.80. That was up just 3.7% from a year earlier, suggesting wage costs remain under wraps. Fed officials are counting on the slack that comes from a slowing economy to offset higher energy, food and commodity prices and keep inflation in check.

Wall Street economists had expected no change in payrolls and a 5% unemployment rate. However, some economists had braced for a weaker employment number after a report Wednesday from ADP and Macroeconomic Advisers that attempts to mirror the jobs report signaled a contraction in private-sector jobs last month.

The February data support the Fed's recent aggressive response to signs of economic weakness and suggest more cuts ahead. The Fed has lowered the fed funds rate, the rate at which banks lend to each other, by 225 basis points since September to 3%. Wall Street expects at least another 100 basis points in rate cuts, a view supported by Friday's data.

"The Fed has to ease much more," said High Frequency Economics economist Ian Shepherdson, in a research note.

In fact, analysts at HSBC lowered their fed funds forecast to 1% from 2% after release of the payroll data. That would match the five-decade low reached during the previous easing cycle in 2003.

Indeed, the jobs slump increases the chances of what Fed officials call a negative "feedback loop" in which financial market strains lead to a weaker economy, which in turn leads to more financial turbulence. Reflecting those concerns, the Fed on Friday said it would increase the amounts in its term auction facility -- aimed at easing strains in credit markets -- to $100 billion this month and conduct a series of term repurchase agreements starting Friday that could total $100 billion.

Still, the jobs data shouldn't come as too much of a surprise. As Fed governor Frederic Mishkin observed in a speech Tuesday, "the labor market appears to have softened further in February," due to "appreciably" higher weekly jobless claims.

Though the economy may flatten or even contract this quarter and next, economists hold out more hope for the latter part of the year as fiscal and monetary stimulus kick in. Former Fed governor Laurence Meyer, for instance, expects the recently enacted fiscal stimulus package to add almost three percentage points to third quarter economic growth.

The Labor Department said hiring last month in goods producing industries fell 89,000. Within this group, manufacturing firms cut 52,000 jobs, the 20th-straight monthly decline. Construction employment was down by 39,000, the eighth-straight drop. Residential building bore the brunt of the decline, but nonresidential construction jobs fell as well, suggesting that the housing slump is broadening.

Service-sector employment rose just 26,000, the slowest gain since October 2005. Business and professional services companies shed 20,000 jobs, and the financial sector lost jobs for the seventh-straight month, reflecting recent credit and mortgage-market turmoil. Education and health services employment, in contrast, advanced by 30,000. Leisure and hospitality rose 21,000, while retail trade lost 34,100 payrolls. The government added 38,000 jobs.

The average work week was unchanged at 33.7 hours. But a separate index of aggregate weekly hours fell.

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Source: www.wsj.com