By John W. Schoen Senior producer
msnbc.com
updated 5/4/2007 1:54:47 PM ET 2007-05-04T17:54:47

The government reported Friday that the economy added just 88,000 jobs last month, the slowest pace of job creation in more than two years, as an ongoing housing slump continued to put a damper on the pace of hiring and business growth.

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The jobs growth slowdown nudged the nation's unemployment rate up to 4.5 percent. Friday’s report also said the number of new jobs in February and March turned out to be weaker than originally reported. Gains in workers’ wages also slowed in April.

The report adds to evidence of a slowing economy. The nation's gross domestic product grew at a sluggish 1.3 percent rate in the first quarter, the weakest in four years, the government reported last week. That slow growth is expected to continue at least until the housing industry recovers. Many economists suggest that a prolonged slowdown could help work off the excesses of the housing boom and prevent the economy from tipping into a recession.

Federal Reserve Chairman Ben Bernanke believes the economy will avoid falling into a recession this year, although his predecessor, Alan Greenspan, has put the odds of a recession at one in three.

The weak jobs report bolsters the widely held view that the Federal Reserve will leave the key federal funds interest rate at 5.25 percent when it meets Wednesday. The Fed has held the rate steady since last August, ending a two-year string of rate increases intended to ward off inflation.

As expected, Friday’s report showed the construction and manufacturing sectors were hit hard in April, with a net loss of 29,000 jobs for the month.

Until recently, despite a steep downturn in home sales and housing starts, jobs in housing-related sectors had been holding up fairly well. While the market seemed to be recovering at the beginning of the year, it now appears many parts of the housing industry — from contractors to real estate agents to building supply companies — have been holding out for an upturn.

“These folks were waiting for the pickup in construction in the spring and summer, and that’s not happening,” said Mark Zandi, chief economist at Moody’s.com. “It was a great run, a lot of money was made and people are just reluctant to leave the industry. And it has taken a while for them to adjust their thinking with respect to future of the industry and their prospects for gainful employment.”

Forecasts vary on the timing of a housing industry turnaround, but many homebuilders and economists say it probably won’t happen before at least early 2008.

“It will probably take about a year before housing reaches the outright bottom,” said Mark Vitner, senior economist at Wachovia Corp. “But the biggest drag on the economy will be behind us by the middle of this year.”

Friday’s jobs report showed a net loss of 19,000 manufacturing jobs in April, as the job outlook for factory workers continues to deteriorate, especially in the auto industry.

With U.S. manufacturing still in decline, prospects for future job growth depend heavily on the U.S. consumer continuing to spend. The latest data show spending holding up, but barely. In March, consumer spending edged higher but posted its weakest gain in five months in part because higher gasoline prices put a crimp in household budgets.

The slowdown in wages reported in Friday’s employment report could further dampen spending. Average hourly earnings rose to $17.25 in April, a 0.2 percent increase from March. Economists were expecting a modest 0.3 percent rise. Over the past 12 months, wages grew by 3.7 percent, the slowest annual increase in a year.

Household budgets are already showing other, long-term signs of stress, according to Brian Fabbri, chief economist with BNP Paribas.

“We’ve never seen this much increase in debt relative to income, and we’ve never seen the proportion of current income that has to service that debt,” he said. “The consumer has dipped into saving in a meaningful way — we’ve had 20 months in a row of negative savings. That can’t go on forever because you just exhaust savings.”

Friday’s report showed the job losses spreading beyond manufacturing and construction and into retailing and financial services.

But health care and education, leisure and hospitality, government and various professional and business services were among the sectors adding positions.

The relatively strong outlook for service jobs was boosted by a report Thursday from the Institute for Supply Management, an industry group that publishes a widely watched index of business activity. That index rebounded strongly in April, posting its biggest gain in year, with the finance and insurance industry among those sectors reporting growth.

“[That’s] a positive indication that the sharp escalation of subprime mortgage problems in February and March may have peaked at the end of March and abated somewhat in recent weeks,” wrote economist Brian Bethune of Global Insight.

But it remains to be seen whether the financial impact of the collapse of subprime lending has run its course. That’s because many of these mortgages were bundled into pools of loans, chopped up into securities and sold off to investors and hedge funds. Because the holders of these so-called “collateralized debt obligations” can delay taking losses, it may be some months before the full impact of the subprime mortgage meltdown is known

“They can hold on for some time as credit quality continues to erode,” said Zandi.

The Swiss bank UBS became the latest casualty of the U.S. mortgage market when it surprised investors Thursday by reporting lower first quarter profits and said it was closing down its Dillon Read hedge fund because of heavy losses in subprime loans.

The Associated Press contributed to this report.

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