Jobs data support Fed rate pause

Unemployment starts to climb as payroll jobs rise just 113,000 in July


WASHINGTON -- A weaker-than-expected employment report for July might be all the Federal Reserve needs to take a pause from raising interest rates after 17 straight increases.

That was a conclusion in financial markets yesterday after the Labor Department reported that payroll jobs rose 113,000 last month, about 37,000 below the consensus figure. The national unemployment rate rose to 4.8 percent in July from 4.6 in June.

Central bankers have been looking for the right moment to bring its interest rate increases to a halt-- and analysts said that moment appears to have arrived as a result of the less-than-robust employment picture.

The Fed will meet Tuesday to consider another rate increase, a move that will affect millions of Americans paying back loans tied to variable rates. Chairman Ben S. Bernanke has indicated an eagerness to stop the interest rate increases that began more than two years ago, in June 2004, but inflation worries so far have made him hesitate.

Job seekers might not be so enthusiastic about the slower pace of job creation announced by the Bureau of Labor Statistics yesterday.

That could be partly because another debate is rising: Will the central bank be forced to boost interest rates at its Sept. 20 meeting if it should take a pause Tuesday? Ethan Harris, economist at Lehman Brothers, said that's just what he expects to happen.

"We don't share the bond market's conviction that inflation is going to slow," Harris said. There will be new economic data over the next few weeks showing higher wage increases and slowing productivity, he said.

Nariman Behravesh, chief economist at Global Insight, a Boston consulting firm, agreed that there will be a pause and then another rise in interest rates in September. "All the inflation indicators are flashing yellow and soon will be flashing red," he said.

But Bernard Baumohl, executive director of the Economic Outlook Group LLC in New Jersey, said he doubted there would be another increase in September.

The stock market rose after the jobs report, but turned down later in the day. The Dow Jones industrial average finished down 2.24 points at 11,240.35.

Evidence of slowing

The employment report provided solid evidence the economy is continuing to slow from a blistering first quarter, and that hiring has tapered off while still remaining at a respectable rate.

Though inflationary pressures have been rising over the past few months at a rate that makes the Federal Reserve uncomfortable, the softer jobs report could indicate to the central bank that the economy is slowing enough to contain these price pressures and warrant a pause. Its benchmark interest rate - the overnight rate on bank-to-bank loans - now stands at 5.25 percent.

Higher interest rates have been a key factor in the slowing economy and softer jobs picture. They have led to a downturn in the housing market and played a role in slower consumer spending. Sharper energy prices also have impinged on purchasing power.

The 113,000 payroll jobs created in July was seen by analysts as slightly under the monthly job increase needed to absorb new entrants into the work force and keep the unemployment rate from rising. The report showed that the service sector added 115,000 jobs, but there was a decline of 2,000 new positions in the goods-producing sector. Government employment was flat.

Unemployment data

The unemployment rate, calculated by a separate survey of households rather than business payrolls, went up because the labor force rose by 213,000 and the number of jobs declined by 34,000 - causing a net increase of 247,000 in unemployment.

The household survey provides a broader measure of the nation's job situation, in that it covers the self-employed and small firms not necessarily picked up in the payroll survey. But some analysts say that in any given month it can provide a misleading employment picture.

Baumohl said that quarterly numbers showed the deterioration in the number of payroll jobs created. In the first quarter, the average monthly increase in payrolls was 176,300 jobs. In the second, it slumped to 112,000 a month, and "we now have preliminary evidence that this softness has slipped into the third quarter as well," Baumohl said.

The July numbers also brought a sharp rise in the duration of those out of work. The median duration went up to 8.2 weeks in July from 7.5 weeks in June.

William Neikirk writes for the Chicago Tribune.

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