The US added only 88,000 new jobs in March, less than half the figure economists had been expecting. The figure is the first since Washington implemented deep spending cuts across the budget at the start of the month.
The unemployment rate dipped slightly to 7.6% but only because 496,000 people stopped looking for work and fell out of the workforce. The surprisingly poor numbers triggered a sell off on the US stock markets with the Dow Jones Industrial Average falling 139 points as the market opened.
Economists polled by Dow Jones Newswires had forecast that 200,000 new jobs were created in March — down from 236,000 jobs added in February.
Private companies added only 95,000 jobs. Federal government payroll jobs fell by 14,000 as 12,000 postal workers were laid off.
Gus Faucher, senior macroeconomist at PNC bank, said it was hard to see anything positive in the report. "Even wages are flat, it's very disappointing," he said. Faucher said tax hikes brought in at the start of the year or business concerns about the the so-called sequester budget cuts may have caused the slowdown.
"It could be a one off. The previous months figures have been revised up, which is good, but we'll have to wait and see," he said.
The figure drew fire from Republicans. "The president's policies continue to make it harder for Americans to find work. Hundreds of thousands fled the workforce last month and unemployment remains far above what the Obama administration promised when it enacted its 'stimulus' spending plan," House speaker John Boehner said in a statement.
He called on President Obama to deliver a balanced budget next week "one that includes entitlement reforms that are not conditional on enactment of more tax increases, which will suppress growth instead of encourage it".
The economy added an average of 187,000 jobs a month from September to February. January's figure was revised up 119,000 to 148,000, and February's was revised up from 236,000 to 268,000.
But the figures follow on from Thursday's report from the Labor Department which reported claims for unemployment benefits spiked in the latest week to the highest level in four months. Weekly claims for unemployment benefits have risen for three weeks, the department also cautioned the Easter holidays could have skewed figures.
The rise comes a month into the government spending cuts agreed to as a compromise over the US budget crisis. The sequestration cuts began on March 1 and affect all areas of government spending from the military to park services.
On Wednesday ADP, the payrolls giant. released its latest survey of private sector employment. According to ADP the US added 158,000 new jobs in March, below the 200,000 economists had been expecting. Gains were largely in the service sector. Construction, which was hit hard in the recession, added no net jobs over the month following average monthly gains of 29,000 in the three months prior.
Commenting on the ADP figures Mark Zandi, chief economist of Moody's Analytics, which helps compile the report, said: "Job growth moderated in March. Construction employment gains paused as the rebuilding surge in the wake of superstorm Sandy ended. Anticipation of Health Care Reform may also be weighing on employment at companies with close to 50 employees. The job market continues to improve, but in fits and starts."
The latest jobs news is unlikely to solve the dilemma now facing the Federal Reserve. Chairman Ben Bernanke has been pumping $85bn a month into the US economy with the aim of keeping interest rates at rock bottom and encouraging investment in jobs making ventures. But the policy has split the Fed's board of governors with some increasingly vocal in their concern about the long term impact of open-ended bond buying program – known as quantitative easing.
Long-time critic Esther George, president of the Federal Reserve Bank of Kansas City, said Thursday that the Fed should scale back immediately.
"To be clear, I support an accommodative stance of monetary policy while the economy recovers and unemployment remains high. But I view the current policies as overly accommodative, causing distortions and posing risks to financial stability and long-term inflation expectations with the potential to compromise future growth. As the Fed's balance sheet continues to expand, the risks and costs increase in my view," she said in a speech in Oklahoma.
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