US jobless rate hits 9-year high

Unemployment in the US jumped to a nine-year high last month, shattering hopes that the world's largest economy has turned the corner.

The dollar sank and shares on Wall Street fell after the US bureau of labour statistics reported the jobless rate climbed from 6.1% to 6.4% last month, the highest since April 1994.

Analysts fear rising unemployment could extinguish the tentative recovery in household spending which began in the spring. More than 1m jobs have been lost over the last three months, taking the jobless total to more than 9m.

"We're a consumer-driven economy and we need to see employment find a base," said Peter Dunay, chief market and options strategist at brokerage Wall Street Access.

The US Federal Reserve signalled its worries about the health of the economy when it cut rates to a 45-year low of 1% last month. America's central bank now believes a Japanese-style deflationary spiral is a bigger threat than its tradi tional enemy, inflation. Yesterday's figures prompted warnings that further cuts might be needed to stabilise the economy.

"The US economy seems to be still in its soft patch," said Paul Ashworth of Capital Economics. "If growth remains below trend in the second half as we expect then it will not be long before the Fed is called upon to cut rates again."

With the Fed dangerously close to its interest rate floor, speculation is growing that more unorthodox remedies may be needed, including pumping money directly into the economy by buying back long-dated government debt.

President Bush is pinning his re-election hopes on this month's $350bn (£210bn) tax cut shoring up consumer confidence. Mr Ashworth said that with the labour market looking uncertain, households would be more likely to save the money or pay off debt rather than spend.

"Disappointment in the labour market cannot just be dismissed as backward looking news," he said.

"Household spending is still the key to the recovery and this is unlikely to see any significant acceleration while employment is contracting at these sorts of rates."

The breakdown of the jobs report showed manufacturers cut 56,000 jobs last month, partially offset by a 10,000 rise in service-sector employment. However, 38,000 of the jobs created last month in the service sector were temporary and analysts warned that without an improvement in the economy many could disappear.

There was some encouraging news in a separate report on the linchpin service sector, which showed it expanded more quickly than expected last month.

The Institute for Supply Management said its index of non-manufacturing activity surged to 60.6 in June from 54.5 in May. A reading above 50 signals growth in the service sector.

"The services sector may be gin to generate some jobs in the second half of the year. I think we could be seeing better employment numbers down the road," said Gary Thayer, chief economist at AG Edwards & Sons in St Louis.

The report helped Wall Street claw back its initial losses and the dollar fight back against the euro.

"This is a battle back and forth in the short term between those betting on the outcome for the US economy in the second half of the year," said Russell LaScala, chief spot dealer at Deutsche Bank in New York.

At midday, the Dow Jones industrial average was down 45.31, or 0.5%, at 9,097.53, having gained 157.4 in the previous two sessions.