Subprime-battered mortgage lenders are shutting down, fewer homes are being built, and even some of the big U.S. retailers are planning conservatively for Christmas holiday sales.

It will take a few months to show up in the economic data that Wall Street and the Federal Reserve watch, but the slowing U.S. economy is hitting the job market, and economists say it is only a matter of time before unemployment ticks up.

Growth is skimming along at around 2 percent, and that is not strong enough to keep the unemployment rate from rising, said Brian Bethune, U.S. economist with Global Insight in Lexington, Massachusetts.

Jobs mean paychecks, paychecks mean spending, and consumer spending accounts for more than two-thirds of the U.S. economy, so employment remains the linchpin as the United States grapples with a housing downturn that has triggered a broader tightening of credit terms.

The August employment report, due on September 7, will be closely scrutinized for signs of weakness, although September and October may show the biggest hits as the recent string of job cuts filter through from the likes of Bear Stearns Cos, Countrywide Financial Corp and Capital One Financial Corp.

The obvious blows to the jobs market will come from construction and financial services, which includes mortgage companies, but Bethune also sees potential losses from the transportation sector if freight shipments fall, and retail hiring may be lower than normal this holiday season.

Wal-Mart Stores Inc, the world's biggest retailer, recently lowered its full-year profit forecast on concerns about consumer spending, while its closest rival, Target Corp, said it was planning more conservatively for the rest of the year.

DOMINO EFFECT

Abiel Reinhart, an economist with JPMorgan Chase, said signs of job-market weakness will show up first in the weekly report of initial jobless claims. Thursday's report showed initial claims edged down, although the four-week average, which irons out volatility, moved higher.

Many economists think the U.S. economy was on fairly solid footing before the worst of the financial market unrest began on August 9, and data released on Friday supported that view.

New home sales in July rose more than expected, and orders for long-lasting U.S.-made manufactured goods posted the biggest rise since September.

And this is likely to be as good as it gets.

Global Insight will publish its monthly economic outlook in the first week of September, but following the recent market turmoil, the group took an early look at its forecasts, and the picture isn't pretty.

Unemployment is likely to rise to 5.1 percent by the second half of 2008, up from 4.6 percent now, Global Insight predicted. Real gross domestic product, the broadest measure of the economy, will likely drop below an annual rate of 2 percent in the fourth quarter of 2007 and remain in the 1 percent to 2 percent range until the third quarter of 2008.

Strategists at Dresdner Kleinwort argue that despite the apparent calm in global financial markets this week following the Fed's unexpected cut in the interest rate it charges banks on direct loans, the housing downturn has already started a domino effect that may end badly for the global economy.

In a note to clients, Dresdner analysts reprinted a recent cartoon from the Atlanta Journal-Constitution showing a line of houses toppling over, domino-style, with the labels subprime mortgages, mortgage companies, lenders, home builders, markets, U.S. economy, and world economy.

In the illustration, the U.S. and world economy are still standing, but directly in the shadow of the tipping markets.

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