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WASHINGTON (Reuters) – The unemployment rate shot to a 14-1/2 year high last month as employers slashed jobs by an unexpectedly steep 240,000, suggesting President-elect Barack Obama will face a deep recession when he takes office.

The Labor Department said on Friday the jobless rate rose a steep four-tenths of a percent to 6.5 percent in October, the highest since March 1994, and that job losses in September and August were deeper than previously thought.

So far this year 1.2 million U.S. jobs have been lost, with 651,000 in the past three months alone as the slide in the national labor market picked up in intensity.

"We have entered the phase of serious recession conditions. Unfortunately we will encounter more of this," said Richard DeKaser, chief economist for National City Corp in Cleveland.

Goldman Sachs economist Jan Hatzius said the data implied the U.S. economy was sinking into a deep recession in which the jobless rate could climb to 8.5 percent by the end of 2009.

While the data was bleak, it was not as grim as some had feared. While the dollar fell, U.S. stocks rose after two days of sharp losses and prices of U.S. Treasuries turned lower.


About 284,000 jobs were shed in September, the most since November 2001, shortly after the September 11 attacks on the United States, and 127,000 were lost in August. In all, 179,000 more jobs were cut in August and September than previously thought.

Michael Feroli, an economist with JPMorgan Chase, said the surprising weakness in August and September suggests the economy headed into recession even before the worst of the credit crisis hit.

"Whereas it had been thought the financial crisis pushed a teetering economy over the edge, it now looks like that crisis kicked an economy that was already down," Feroli said.

Fear about job security has led U.S. consumers to cut spending, and that has reverberated around the globe, with China and other low-cost goods producers feeling the impact of slacker American demand.

On Capitol Hill, Democratic Sen. Charles Schumer of New York described the job numbers as "shocking" and said they call for "a strong, deep and effective stimulus package."

General Motors Corp, which along with other domestic carmakers is pleading for government help, said it had a $4.2 billion operating loss in the third quarter.

In a telephone interview, Commerce Secretary Carlos Gutierrez said the economy "will go through several difficult months," but by the time Obama takes office in January a Treasury plan to buy bad assets from banks should be working. He predicted that will ease some economic pressures.

The Bush administration is "willing to listen to ideas (on stimulus) but most of what we’ve heard called stimulus doesn’t meet our definition of stimulus," Gutierrez said.

Stimulus measures should be targeted to have immediate effect rather than designed for long-term impact like road building and other infrastructure projects, he added.

Obama was to huddle with his top economic advisers in the afternoon before holding his first news conference since being elected, and the data underscored the challenge he will face.


The U.S. Federal Reserve has cut benchmark interest rates to a low 1 percent over the last 13 months in an effort to buffer the economy from the widening credit crisis, and financial markets expect rates to go lower still.

In a separate report, the Commerce Department said wholesale inventories dipped in September, but sales were off for a third straight month and a stocks-to-sales gauge suggested businesses were holding more inventory than desired.

The National Association of Realtors said pending sales of existing U.S. homes dropped 4.6 percent in September because of tighter credit and worsening economic conditions.

The jobs report showed the construction industry shed 49,000 jobs last month, the 16th straight monthly loss.

It also showed a whopping 90,000 manufacturing jobs were cut in October — reflecting in part 27,000 striking workers at Boeing Co and marking the 28th consecutive month in which factory employment has fallen.

Earlier this year, job losses had been concentrated on the goods-producing side of the economy. But the latest data showed the pain spreading further into the vast services sector.

Service industries cut 108,000 jobs last month, on top of 201,000 lost in September.

(Additional reporting by Doug Palmer, Ros Krasny in Chicago and Burton Frierson in New York; Editing by Dan Grebler)