Deepening recession fears foreshadow rate cuts

By Steven C. Johnson

NEW YORK (Reuters) - Record declines in the vast U.S. and European service sectors and more grim U.S. employment news on Wednesday sparked fear of an economic "free fall," setting up another round of aggressive interest rate cuts.

Central banks in Thailand and New Zealand led the way, rolling back borrowing costs sharply. Britain, the eurozone and Sweden were expected to follow suit on Thursday as worries about a prolonged global recession set in.

U.S. stocks rallied, though, as recession fears boosted consumer staples and other defensive shares, while a late rally lifted the FTSEurofirst 300 index of European shares by 0.5 percent, capping off a roller-coaster session.

Reports showing the U.S. service sector, the main engine of economic growth, fell to a record low while private employers shed 250,000 jobs in November -- the most in seven years -- also boosted chances the Federal Reserve will cut interest rates later this month.

The jobs data from ADP Employer Services also suggested Friday's more comprehensive government report could show job losses in excess of 300,000, which would be the highest since the aftermath of the September 11, 2001 attacks.

"The fourth quarter of 2008 is experiencing an economic free fall," said Richard DeKaser, chief economist at National City Corp in Cleveland. "We haven't had this kind of a collapse in a very long time."

A snapshot of U.S. business conditions released by the Fed on Wednesday showed activity weakened across the country in October as job layoffs picked up and retail sales slumped.

It came two days after a private research group considered the official arbiter of business cycles said the U.S. economy entered recession in December 2007. Economists forecast it would likely stay there through the middle of 2009, which would make it the longest recession since the 1930s.