Job Losses Accelerating

The slumping U.S. service sector and a weakening job market dealt further blows on Wednesday to an economy teetering on the brink of recession, while bad news continued unabated on the inflation front.

The U.S. service industry shrank for a second month in February, though at a slower pace, according to a report by the Institute for Supply Management that showed more improvement than expected but still painted a weak picture overall.

The U.S. private sector unexpectedly shed jobs for the first time in nearly five years in February, according to a private report that does not bode well for the government's key U.S. employment report on Friday.

The Federal Reserve said that all of its districts reported decelerating economic growth in early 2008, while prices pressed upward almost everywhere in the United States.

After the U.S. economy nearly ground to a halt in the fourth quarter of 2007 the Fed's "Beige Book" report appears to increase the odds of a contraction and more interest rate cuts to cushion the fall, though this may add fuel to inflation.

"It looks pretty weak across the board," said Robert Brusca, chief economist at Fact and Opinion Economics in New York. "It says that the Fed needs to and can continue to cut rates."

There was more unwelcome news on inflation. While U.S. productivity in the fourth quarter was slightly better than earlier estimated, labor costs were also considerably higher, according to revised government figures.

Oil rallied $5 to a record near $105 a barrel. The Fed said upward pressure on prices from rising materials and energy costs showed up in almost all districts, but analysts see the Fed, the U.S. central bank, more focused on growth.

"The Fed is basically allowing inflation concerns to take a back seat to growth. But at some point ... we're basically setting ourselves up for an inflation problem," said William Larkin, fixed income portfolio manager with Cabot Money Management in Salem, Massachusetts.

On Wall Street, stocks ended a little higher. The dollar was mixed, gaining versus the yen but hitting another record low versus the euro .

Prices of government bonds, which benefit from weak economic data but suffer from inflation, fell.

A government report showed new orders at U.S. factories fell 2.5 percent in January. That was the first decline since August and comes after a separate report from ISM on Monday showed the U.S. manufacturing sector contracted in February.