U.S. job growth cools, unemployment rate rises

WASHINGTON (Reuters) - U.S. job growth slowed in July and the unemployment rate unexpectedly rose, pointing to slack in the labor market that could give the Federal Reserve room to keep interest rates low for a while.

Nonfarm payrolls increased 209,000 last month after surging by 298,000 in June, the Labor Department said on Friday. Economists had expected a 233,000 job gain.

Although job growth was below expectations, July marked the sixth straight month employment expanded by more than 200,000, a signal of strength last seen in 1997. In addition, data for May and June was revised to show 15,000 more jobs created than previously reported.

The one tenth of a percentage point increase in the unemployment rate to 6.2 percent came as more people entered the labor market, an indication of confidence in job prospects.

"It's a goldilocks report for an economy that is steadily expanding but not lifting off. It will reinforce for now the Federal Reserve's commitment to a gradualist policy approach," said Mohamed El-Erian, chief economic advisor at Allianz in Newport Beach, California.

Prices for U.S. Treasury debt rose as traders trimmed bets the Fed would push rates up in the first half of next year, with rate futures indicating only a 48 percent probability of an increase in June, down from 58 percent.

U.S. stocks briefly gained as the prospect of continued low interest rates soothed investors after a sharp sell-off on Thursday, but were lower by midday. The dollar was little changed against a basket of currencies.

The report showed average hourly earnings, which are being monitored as a potential signal of reduced job market slack that could prompt the Fed to raise rates, rose only one cent.

That left the annual rate of increase at 2.0 percent, well below the levels that would make Fed officials nervous. Other measures that have shown wages rising more briskly have some economists worried the central bank could fall behind the curve.

Policymakers on Wednesday cautioned that "significant" labor market slack remained, signaling patience on the rate front. The Fed has kept benchmark rates near zero since December 2008.

LITTLE INFLATION

A separate report from the Commerce Department showed inflation easing in June. A price index for consumer spending, excluding food and energy, edged up 0.1 percent after gaining 0.2 percent in May.

Through the 12 months through June, the index was up just 1.5 percent, still below the Fed's 2 percent target.

The same report showed income grew 0.4 percent in June.

"We are looking for stronger earnings gains as slack in the labor market dissipates," said Scott Anderson, chief economist at Bank of the West in San Francisco.

The cooling in hiring did little to change expectations for strong economic growth in the third quarter. Another report from the Institute for Supply Management showed factory activity at its highest level in more than three years in July, buttressing those expectations.

The rise in activity was driven by a surge in orders and hiring.

"It adds to the growing list of economic indicators pointing to a sustained rebound in economic growth momentum," said Millan Mulraine, deputy chief economist at TD Securities in New York.

The economy grew at a 4.0 percent annual pace in the second quarter after shrinking at a 2.1 percent rate in the first three months of year. While restocking by businesses lifted the figure, growth is seen remaining sturdy for the rest of 2014.

A fourth report showed consumer sentiment little changed in July as households kept an eye on the steadily improving labor market. The unemployment rate has declined from a peak of 10 percent in October 2009. While Americans leaving the workforce has been a factor, job gains have also contributed to the drop.

"The job market has moved from a 'fake recovery,' with unemployment falling due to people abandoning the labor force, to a real recovery of steady 200,000-plus payroll gains," said Ethan Harris, global economist at Bank of America Merrill Lynch in New York.

The labor force participation rate, or the share of working-age Americans who are employed or at least looking for a job, increased to 62.9 percent in July after holding at 62.8 percent for three consecutive months.

But other measures closely watched by Fed Chair Janet Yellen took a step back.

A broad measure of joblessness that includes people who want to work but have given up searching and those working part-time because they cannot find full-time employment edged up to 12.2 percent. It had touched its lowest level in more than 6-1/2 years in June.

At the same time, the ranks of the long-term unemployed swelled and the length of time Americans are spending unemployed rose after reaching its lowest point in more than five years in June.

July's job gains were broad-based. Services industries accounted for the bulk of the gains, adding 140,000 positions. That compared to a 232,000 job increase in June.

Manufacturing payrolls increased for the 12th month in a row, adding 28,000 jobs. Construction employment advanced for the seventh consecutive month, with July payrolls rising 22,000. Government employment increased by 11,000 jobs.

The length of the average workweek held steady at 34.5 hours.

(Reporting by Lucia Mutikani; Additional reporting by Jennifer Ablan and Rodrigo Campos in New York; Editing by Andrea Ricci)