Jobs growth stalls, setting back recovery hopes

WASHINGTON (Reuters) - U.S. jobs growth ground to a near halt in June as employers hired the fewest workers in nine months, frustrating hopes the economy would bounce back quickly from a slowdown in the first half of the year.

Nonfarm payrolls rose only 18,000, the Labor Department said on Friday. It was the weakest reading since September and below even the most dire forecast in a Reuters poll of economists.

The dismal report, which showed the unemployment rate climbing to a six-month high of 9.2 percent, stood in stark contrast with recent data on manufacturing and retail sales that had shown activity starting to perk up.

"This report has dashed hopes that the economy was about to accelerate again," said Nigel Gault, chief U.S. economist at IHS Global Insight in Lexington, Massachusetts. "It is showing a much bleaker picture than other indicators and we must hope that it is overstating the extent of the slowdown."

Stocks on Wall Street tumbled on the dour report, while Treasury debt prices rallied on the view the Federal Reserve would keep overnight interest rates near zero well into next year. The dollar rose against a broad basket of currencies as investors turned risk averse.

Contributing to the weak tenor of the report, the department said the economy created 44,000 fewer jobs in April and May than previously thought.

Government was the biggest drag in June, but the weakness was widespread and could pressure the Fed to consider further action to help the economy. Officials, however, have set a high bar after completing a $600 billion bond-buying program last week.

Still, economists are holding on to their belief that the economy will soon pull away from its first-half soft patch and do not see new recession on the horizon.

"You have to look at the more recent data and they have been much more positive. We haven't seen the economy faltering further, instead we have seen the economy coming back," said Joel Naroff of Naroff Economic Advisors in Holland, Pennsylvania.

Motor vehicle manufacturers are ramping up production as the shortage of parts from Japan eases and retailers reported better-than-expected sales in June.

DEBT CEILING IMPASSE HURTING

The employment data dealt a blow to the Obama administration, which has struggled to get the economy to absorb the 14.1 million unemployed Americans. So far, the economy has regained only a fraction of the more than 8 million jobs lost during the recession.

It could also stiffen the resolve of Democrats to push for near-term stimulus as they seek a deal with Republicans to cut the U.S. budget deficit.

The economy is the top concern among voters and will feature prominently in President Barack Obama's bid for re-election next year.

In an appearance at the White House, Obama said an impasse in budget negotiations that is blocking a needed increase in the nation's debt limit had contributed to the reluctance by businesses to hire.

"The sooner we get this done, the sooner that the markets know that the debt limit ceiling will have been raised," he said.

Republicans pointed the blame at Democrats.

"Today's report is more evidence that the misguided 'stimulus' spending binge, excessive regulations, and an overwhelming national debt continue to hold back private-sector job creation in our country," House of Representatives Speaker John Boehner said in a statement.

The economy needs to create between 125,000 and 150,000 new jobs a month just to absorb new labor force entrants.

The private sector added 57,000 jobs last month, while government employment shrank 39,000 -- the eighth straight monthly decline -- as local and state governments continued to wield a budget ax.

Factory payrolls rebounded 6,000 after contracting in May for the first time in seven months, reflecting a step-up in motor vehicle production. Construction employment fell 9,000 last month after declining 4,000 in May

The length of the average workweek fell to 34.3 hours from 34.4 hours. Employers have been reluctant to extend hours because of the uncertainty surrounding the recovery and the decline suggested they were facing little pressure to increase hiring soon.

Average hourly earnings slipped a penny, the first decline since November and more evidence that wage-driven inflation is not a risk. Over the past year, earnings have risen only 1.9 percent.

(Editing by Andrea Ricci)