The monthly ADP Employer Services (ADP) survey – which tracks private non-farm payroll employment – stunned economists, showing a surprising increase from the 476,000 jobs lost in November.

The decline was the worst in the history of the survey, which began reporting in 2001. And if the findings are matched by the official government jobs report, due out Friday, it would be the biggest employment drop since the U.S. recession of 1975.

“This is an eye-poppingly bad number,” Art Hogan, the New York-based chief market analyst at Jefferies & Co. (JEF), told Bloomberg News. “The economy is in very difficult shape and that’s been proved out over the economic data from the past month.”

In fact, the numbers echo a trio of downbeat economic reports from the manufacturing, housing and service sectors reported by Money Morning just yesterday. Those numbers very graphically portray the severity of the current recession.

The economy has shed 1.9 million jobs this year as payrolls have dropped the last 11 straight months. U.S. companies slashed 533,000 jobs in November, according to the U.S. Commerce Department, and the unemployment rate grew to 6.7%, its highest level since 1974.

Unemployment numbers are considered by economists to be a snapshot of the health of both the labor markets and broader economy.

Job losses of this magnitude have a profoundly negative impact on the U.S. economy – and major ripple effects on economies worldwide – because jobless consumers are forced to cut back on spending. Fully 70% of all domestic economic activity is powered by consumer spending.

Stocks Can’t Weather the Storm

In response to the latest news, U.S. stocks slid and experienced their worst losses in two weeks, reversing a pattern in which investors seemed to be ignoring bad news as they bid up shares and notched steady gains.

The Dow Jones Industrial Average fell 245.16 points, or 2.72%, to close at 8,769.94. The Standard & Poor’s 500 Index declined 28.05 points, or 3.0%, to close at 906.65. The tech-focused Nasdaq Composite Index fell 53.32 points, or 3.23%, to end the day at 1,599.06.

Intel Corp. (INTC) and Alcoa Inc. (AA) exacerbated the slide, providing still more evidence of declining corporate revenue and layoffs. Intel projected that fourth-quarter revenue would fall 23% from 2007 levels because of weak demand, while Alcoa announced it will eliminate 13,500 jobs, or 13% of its work force.

Intel shares dropped a little more than 6.0% yesterday, while Alcoa shares shed more than 10% of their value.

“These are extraordinary times, requiring speed and decisiveness to address the current economic downturn,” Alcoa’s Chief Executive Officer Klaus Kleinfeld told MSNMoney.

The hardest-hit U.S. business sector was the service sector, which lost 473,000 jobs in December. The two other hard-hit sectors were consumer goods, which shed 220,000 jobs, and manufacturing, which jettisoned 120,000 workers.

“December does typically see seasonal hiring for the holiday season and plainly the anticipation of poor Christmas sales has played a major role in pushing down the adjusted numbers,” Alan Ruskin, an analyst at RBS Global Banking & Markets (ADR: RBS) told The Financial Times.

Official Government Report on Tap Friday

All eyes now turn to the afore-mentioned official government labor report, due on Friday. If the results match it would represent yet another historic number, making it the biggest employment drop since the 1975 recession.

ADP collects a wealth of information as it processes 500,000 payrolls for U.S. companies with aggregate employment of more than 24 million. It issues its report two days prior to the government report.

After it significantly undershot the government labor report in November, ADP changed its methodology “to improve the correspondence between nonfarm private employment estimates, and estimates published in the government report,” according the company’s website. Even so, some economists are revising their forecasts upwards.

“The drop in ADP employment in December is staggering and suggests that our original projection of a 500,000 decline in payrolls in December is too small,” RDQ Economics economists John Ryding and Conrad DeQuadros wrote in a research note.

The official employment numbers on Friday could show that as many as 700,000 jobs were lost in December, according to Ian Sheperdson, chief economist at High Frequency Economics. That would be the biggest drop in 59 years.

“This is shockingly awful,” Mr Sheperdson said. “We await Friday with trepidation.”

Source: Stocks Fall as ADP Report Says U.S. Shed 693,000 Jobs in December