Could a recession lie ahead? Watch the job market.

The US economy lost 4,000 jobs in August. Home builders, factories, and schools were hit hard.

By , Staff writer of The Christian Science Monitor

The latest snapshot of American employment showed the first monthly decline in four years, but the worst part is this: The numbers suggest a steady weakening of the job market, not just an August dive.

Factories, home builders, and public schools all saw big employment losses in August, yielding a net loss of 4,000 jobs for the nation. But what's more troubling than the negative tally, economists say, is the breadth of deceleration.

Job creation in the service sector, where most US jobs are, has been cooling – from food services to professional occupations. Healthcare is one notable exception.

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"I don't think it's a one-month number," says John Silvia, chief economist at Wachovia Corp. in Charlotte, N.C. "Businesses are expecting some slowdown in the economy, and they're reacting to it by not hiring people."

Meanwhile, consumer spending has been growing more slowly, too.

These patterns raise the risk of a kind of self-fulfilling prophecy. If economic uncertainty is prompting businesses to postpone hiring, and consumers to postpone purchases, a recession becomes much more probable.

Economists generally foresee tepid growth not an outright contraction of economic activity. But what happens to the job market in the next couple of months could determine the answer to that question.

The heightened threat of recession could prompt the Federal Reserve's policy committee to take stronger action to buoy the economy when it meets next week.

It may cut its target for short-term interest rates by half a percentage point, rather than a quarter point.

"It's a very different ball- game," says Mr. Silvia. "Here you don't have a lot of margin for error."

He points to three numbers as signs of the job-market downshift. In the most recent 12 months, the economy on average has created 133,000 jobs a month. But for the most recent six months, that average has slipped to 103,000. And the average net job gain in the past three months has been just 44,000.

If that three-month total slips into negative territory in the months ahead, that would probably indicate a recession. In 2001, the Labor Department's three-month tally of net job gains veered below zero in April, as that year's recession was just beginning.

(The timing of recessions is declared after the fact by a committee of economists.)

Even one negative month is a bad sign. After all, that hasn't happened since 2003, when the economy was still finding its footing from the previous recession.

But monthly numbers fluctuate widely. And the initial number always gets revised. That's why it's the overall pattern, such as three-month totals, that's key.

"This is a trend" of deceleration, says Rajeev Dhawan, director of Georgia State University's Economic Forecasting Center in Atlanta.

The reasons: A protracted housing slump is affecting many homeowners, realtors, home builders, and the mortgage industry. The automotive industry is undergoing major restructuring. And in the past month, Wall Street firms that thrive on lending or borrowing are feeling the pinch of tighter credit conditions as investors scrutinize default risks.

More broadly, the chief executives who control much of the nation's hiring have grown less confident, Mr. Dhawan says. "It becomes a case of who's going to move first" and hire, he says. "When nobody moves, it becomes a slowdown."

Most sectors of the economy have been expanding their employment this year – even in August. But the pace in many industries is cooling. This reflects slowness to hire more than outright layoffs.

Even in the growing food-services sector, however, some businesses are downsizing.

Mino Settepani, who owns a New York City bakery, says he has cut six positions in the past three years. As costs have risen for milk, eggs, and gas, some of his bread and pastry business became unprofitable.

Not far away, Alberto Ramirez says he looked for work for three months before finding employment this year at the San Marco Pizzeria. "They usually say they aren't hiring," he says as he makes some pizza dough.

America must add some jobs each month just to keep pace with the arrival of new people in the workforce.

In the current economic expansion, the unemployment rate has remained low, and it was unchanged in August at 4.6 percent.

But economists expect that rate to rise unless job creation picks up.

James O'Sullivan, an economist at the investment bank UBS, says the big risk is if credit-market turmoil causes a wider loss of confidence. "Such weakening can become self-perpetuating, with weaker spending leading to weaker employment leading to weaker spending, and so on," he wrote Friday in a report to clients.

But there's nothing inevitable about this potential spiral, he adds. During a global crisis in 1998, business confidence bounced back after the Fed cut interest rates.

"We're at the cusp where it can go either way," Dhawan says.

He sees a 25 percent chance of recession. His brighter scenario is a few months of poor job creation, and then a rebound as the credit squeeze eases. Despite the housing downturn, he says most US consumers "are still pretty healthy."

Nicole Hill contributed to this story from New York.

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