The U.S.jobless rate rose to 5.8% in February as businesses eliminated 308,000 jobs, the steepest cuts since the 2001 recession. Services-producing industries were hit hard.

Friday’s U.S. employment report was a big disappointment, and it has economists contemplating further cuts to U.S. interest rates.

“While the usual suspects will be rounded up as excuses, the report underscores the fragility of the past year’s expansion,” says CIBC World Markets. “Sure, the weather was bad, but the worst storm actually hit after the survey week for these data. Sure, war fears have kept hiring in check, but some of the losses — such as those in manufacturing — are merely an extension of a trend dating back several months. True, 150,000 Americans were called up for duty as reserves, but their jobs would still be included if they were replaced, and some employers who provide pay to their reservists as a policy might have included them in reported tallies. The rest of the blame lies on a recovery that has failed to gather sufficient momentum, and a global economy that has kept pricing power in check, leaving businesses trying to restore profits on the back of cutbacks in hiring and spending.”

CIBC says that February’s payrolls declines featured a 53,000 loss in factory jobs, a weather-related drop in construction employment, and more than 200,000 jobs shed in the service sector. The unemployment rate only moved up one tick, to 5.8%, since the separate survey of households reported a smaller loss in jobs.

“Markets were shocked by a much weaker-than-expected reading on the U.S. jobs front in February,” says BMO Nesbitt Burns. “The dismal report is the strongest signal to-date that the U.S. economy is seizing up in the run-up to war with Iraq. The headline was undoubtedly distorted lower by bad weather and the call-up of reservists, but the underlying picture is not pretty. Talk of a possible Fed rate cut will grow louder … much louder.”

RBC Financial says, “This puts a serious damper on the prospects for a near-term rebound in the U.S. economy, and therefore has negative implications for Canada down the road.” And, it says it now expects a 25 basis point interest rate cut by the Fed at its March 18 meeting. “This rate cut, alongside Fed commentary highlighting the temporary nature of the war-related hit on confidence, will offset the negatives from February’s job report and help the U.S. economy burst upward once war jitters subside,” it predicts.

CIBC says that, in the meantime, personal incomes will be hit by a 1.0% decline in total hours worked, partially offset by a 0.7% rise in average hourly earnings. “For the month as a whole, as opposed to the survey week, actual hours worked will likely be even weaker, given disruptions in the east from adverse weather later in the month.”

“A weak quarter for productivity in Q4, and sluggish growth in Q1 output, are combining in a job reduction onslaught. Recent figures for major layoff announcements and jobless benefit claims point to no great improvement in the month ahead,” says CIBC. “With better productivity, the employment trend could still be consistent with our average 2% GDP growth rate for the first half, and it certainly raises the odds in favor of our forecast for 50 bps in Fed rate cuts by June.”