Unemployment Rate Rises To 5%

WASHINGTON - Wary employers clamped down on hiring and pushed the unemployment rate to a two-year high of 5 percent in December, an ominous sign the economy may slide into recession. President Bush explored a rescue package, including a tax cut, with his economic advisers.

Wall Street reacted to the jobs news by sending the Dow Jones industrial average tumbling 256.54 points Friday.

Gripped by uncertainty, government and private employers last month added the fewest new jobs to their payrolls in more than four years. In fact, employment at private companies declined.

The Labor Department's report, released Friday, provided evidence of an economy greatly strained by a housing slump and a credit crunch.

The disappointing employment figures sent Wall Street into a nose dive, thrust the White House into damage control and ratcheted up the blame game as Republicans and Democrats battle for the presidency. The employment numbers also sparked expectations the Federal Reserve will have to lower interest rates again. As expected, the Fed took action to make cash more available to banks.

Bush said he is on top of the situation. "We can't take economic growth for granted," he said. "There are signs that will cause us to be ever more diligent and make sure that good policies come out of Washington."

The president said he wants to work with Congress "to deal with the economic realities of the moment and to assure the American people that we will do everything we can to make sure we remain a prosperous country."

With the odds of a recession increasing, Bush is weighing the need for an economic stimulation package. The president, who has been plagued by low public approval ratings for his handling of the economy, isn't expected to make any decisions until later this month. Tax cuts are under consideration, White House spokesman Tony Fratto said. "We've done tax cuts before and it's led to growth," he said.

The State of the Union address is Jan. 28 and Bush is likely to unveil his package then.

The civilian unemployment rate jumped from 4.7 percent in November to 5 percent in December, the highest since November 2005 after the Gulf Coast hurricanes dealt the country a mighty blow. Total payrolls, both private employers and government, grew by just 18,000 last month, the worst showing since August 2003, when the economy suffered job losses as it struggled to recover from the 2001 recession.

"This is a major warning shot that the economy is in trouble," said economist Joel Naroff, president of Naroff Economic Advisors.

As part of its recently launched effort to make credit more readily available, the Federal Reserve announced it will provide banks an additional $60 billion worth of loans through two auctions on Jan. 14 and Jan. 28. The Fed's first two auctions offered banks $40 billion in loans.

December's employment picture was much weaker than economists were expecting.

Employers have grown cautious as they try to cope with fallout from housing and credit problems and rising uncertainty about how the economy will fare in the months ahead.

Galloping energy prices and bad weather in some parts of the country also probably figured into the weak job figures.

Manufacturers, construction companies and financial services all cut jobs in December, casualties of the housing slump. Retailers also sliced jobs.

The government added 31,000 jobs in December, while private employers cut payrolls by 13,000, underscoring the weakness.

"Businesses have turned super conservative. With slower economic growth, has come the pink slips," said economist Ken Mayland, president of ClearView Economics.

The unemployment rate for blacks jumped to 9 percent in December, a 15-month high. The jobless rate for Hispanics climbed to 6.3 percent, the highest in more than two years. For all of 2007, the economy added 1.33 million jobs and the unemployment rate averaged 4.6 percent, the same as in 2006. Employment growth averaged 111,000 a month in 2007, down from 189,000 a month in 2006.

The health of the nation's job market is critical in determining whether the economy will survive the stresses from housing and harder-to-get credit. The positive forces of job and wage growth have helped to cushion individuals from all the negative forces in the economy. The big worry is that people will clamp down on their spending and businesses will put a lid on investment and hiring, throwing the economy into a tailspin.

For all of 2007, wages increased 3.7 percent, down from a 4.3 percent gain in 2006. High energy prices, though, probably made some workers feel as if their paychecks aren't stretching as far as they would like.

To fend off the possibility of a recession, the Federal Reserve cut a key interest rate three times last year. Policymakers are expected to lower rates again when they meet at the end of the month. Some analysts are predicting a bold half-point reduction in light of the weak employment report.

The big question, said Stephen Stanley, chief economist at RBS Greenwich Capital: "Has the economy hit a big pothole or careened into the ditch?"