Economy

U.S. Economy: Job Gains Slow, Unemployment Rate Rises
Source: Bloomberg

Aug. 3 (Bloomberg) -- Employers in the U.S. added fewer jobs than forecast and the unemployment rate rose as the economy cooled in response to the worst housing recession in 16 years.

Job growth slowed to 92,000 in July, from 126,000 the prior month, the Labor Department said today in Washington. The jobless rate increased to 4.6 percent from 4.5 percent. A separate report from the Institute for Supply Management showed service industries, which include banks and retailers, expanded less than anticipated.

The slackening in hiring reflects a deepening slump in housing, which has pushed home prices lower and restrained economic growth for the past year. Outside of real estate and the government, the labor market continued its four-year expansion and futures suggest the Federal Reserve is unlikely to reduce interest rates next week. Treasury notes rose, the dollar weakened and stocks retreated.

``We are still creating jobs right around a pace consistent with moderate growth,'' said Michael Feroli, an economist with JPMorgan Chase & Co. in New York and a former Fed forecaster. ``We are getting a little bit of the slack that the Fed was looking for.''

New Fed Forecast

After the employment report, JPMorgan pushed back its forecast for when the Fed will change interest rates. The firm expects an increase in the middle of next year, compared with its prior prediction of around the end of this year.

The Tempe, Arizona-based ISM said its non-manufacturing index dropped to 55.8 last month, from 60.7 in June. The index, which shows service industries still expanding, averaged 56.8 in the previous 12 months.

The central bank, which has kept its benchmark rate at 5.25 percent for a year, has said that a tight labor market risks spurring faster inflation. The Fed anticipates the jobless rate rising to between 4.5 percent and 4.75 percent in the fourth quarter. The rate fell to 4.4 percent in March, the lowest in more than five years.

Chairman Ben S. Bernanke ``made it clear that the Fed has been trying to engineer a rise in the unemployment rate for a while,'' said Christopher Low, chief economist at FTN Financial in New York. ``The modest rise in payrolls should also make them happy.''

Low doesn't anticipate a change in interest rates until December, when he predicts a reduction.

Futures Trading

Traders marked up the chance of a quarter-point Fed rate cut by the end of next month to about 60 percent from 32 percent, based on the price of futures on the Chicago Board of Trade. By year end, traders see the chance of a reduction as a certainty and the possibility of another quarter-point cut at 38 percent, up from 2 percent yesterday, prices showed.

The yield on the benchmark 10-year note declined to 4.68 percent at 4:01 p.m. in New York, from 4.77 percent late yesterday. The Dow Jones Industrial Average tumbled 2.1 percent to 13,179.55. Moves accelerated after Standard & Poor's cut the credit-rating outlook for Bear Stearns Cos.

Economists projected payrolls would rise by 127,000 following a previously reported 132,000 June increase, according to the median of 85 forecasts in a Bloomberg News survey. The jobless rate was forecast to hold at 4.5 percent.

The July payrolls gain ``is still a solid number,'' Commerce Secretary Carlos Gutierrez said in an interview. ``We continue to have momentum coming off a strong quarter. We've got wages growing in real terms, and that should keep the consumer active.''

Revisions

Revisions subtracted 8,000 workers from payroll figures previously reported for May and June.

Wages gained 3.9 percent in July from a year earlier. Workers' average hourly earnings rose 6 cents, or 0.3 percent, in line with forecasts, after a 0.4 percent increase in each of the previous two months.

Service industries, which include banks, insurance companies, restaurants and retailers, added 104,000 workers last month after hiring 133,000 workers in June, the report showed. Government payrolls decreased by 28,000. Retailers shed 1,200 jobs after eliminating 13,500 in June.

Payrolls at builders dropped by 12,000 after increasing 3,000 a month earlier.

``This isn't the last you're going to see on this unemployment rate -- it's going to go up some more,'' said Maury Harris, chief economist at UBS Securities LLC in New York. ``The subprime and housing problem is just not behind us.''

Jobs in Education

Of the 28,000 drop in government jobs, most were related to state and local education. Some economists have said the Labor Department has difficulty adjusting for seasonal changes during the summer holidays.

Manufacturers' payrolls fell 2,000 after declining 13,000 a month earlier. Economists had forecast a drop of 14,000 in employment at factories.

Average weekly hours worked by production workers fell to 33.8 from 33.9. Average weekly earnings rose to $589.81 last month from $589.52 the prior month.

Americans turned more optimistic about employment last month, according to a report from the New York-based Conference Board this week. The share of consumers who said jobs were plentiful surged in July to the highest since August 2001, the independent research group said.

Jobs and wages are key to keeping consumer spending from slowing even more. Spending rose at a 1.3 percent annual pace from April through June, a third of the previous quarter's increase and the smallest gain in more than a year, according to the Commerce Department. Rising exports and gains in commercial construction helped the economy accelerate nonetheless.

Fed Forecasts

Bernanke has forecast ``moderate'' economic growth this year, while remaining concerned about price pressures. A sustained decline in the inflation rate has ``yet to be convincingly demonstrated,'' Bernanke said last month in testimony to Congress.

The Fed's most recent regional survey, known as the Beige Book, showed last week that employment rose in most districts. Many locations also reported ``significant upward pressure on wages and salaries for in-demand, high-skilled workers.''

Not all economists are convinced wages are heading much higher. The unemployment rate is likely to rise in coming months as housing keeps contracting and manufacturing cools, said David Resler, chief economist at Nomura Securities International Inc. in New York.

International Business Machines Corp. is among companies paring staff. The Armonk, New York-based company said this week it will cut 450 U.S. positions, the majority of them at its chip-making facilities.

Others paring jobs include Johnson & Johnson, the world's largest health-care company, which said July 31 it will eliminate as much as 4 percent of its workforce. J&J didn't specify the number of U.S. jobs it would reduce.

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