WASHINGTON (Reuters) — Employers in July hired the most workers in five months in the United States, but an increase in the jobless rate to 8.3 per cent muddled the near-term outlook for monetary policy.
Nonfarm payrolls rose 163,000 last month, the Labor Department said on Friday, beating economists' expectations in a Reuters poll for a 100,000 gain. That snapped three straight months of job gains below 100,000 and offered hope for the struggling economy.
However, the unemployment rate rose from 8.2 per cent in June, even as more people gave up the search for work and a survey of households showed a drop in employment.
The closely watched employment report comes two days after the Federal Reserve sent a stronger signal that a new round of major support could be on the way if the faltering recovery does not pick up.
Most economists had expected the Fed would launch a third round of bond purchases, possibly at its next policy meeting on September 12-13. But the mixed employment report has muddied the picture a bit.
"This is a report that doesn't give a clear read on what the Fed will do. We need to see another jobs report," said Robert Dye, chief economist at Comerica in Dallas.
The Fed has held interest rates close to zero for nearly four years and pumped about $2.3 trillion into the economy.
The labour market slowed sharply after strong gains in the winter, spelling trouble for President Barack Obama.
A recent Ipsos/Thomson Reuters poll showed 36 per cent of registered voters believe Republican presidential candidate Mitt Romney has a better plan for the economy, compared to 31 per cent who had faith in Obama's policies.
The unemployment rate has been stuck above eight per cent for more than three years, the longest run since the Great Depression.
"The key question is now is will it be sustained? The backdrop remains challenged, seeing anything meaningfully better than this will in itself be a challenge," said Tom Porcelli, chief U.S. economist at RBC Capital Markets in New York.
"We're still in an environment where productivity is slowing, where profit growth is slowing, and we don't think that is a robust environment to see meaningful job gains."
U.S. stock index futures added to gains after the payrolls report while Treasury debt prices extended losses. The dollar gained versus the yen and pared its losses versus the euro.
Fears of deep government spending cuts and higher taxes that are due in early 2013, and worries that Europe's debt crisis could get worse remain major obstacles for the U.S. economy.
Economists say the biggest factor weighing on sentiment is fear that politicians in Washington will be unable to avoid the so-called fiscal cliff at the turn of the year.
Limited job destruction
"We are not seeing large scale layoffs, so job destruction is pretty limited," said Scott Brown, chief economist at Raymond James & Associates in St. Petersburg, Florida.
"The problem all along has been a lack of hiring and we expect that the uncertainty about the elections, the fiscal cliff and Europe may restrain the pace of hiring as well as capital spending," Brown said.
Data last week showed the economy grew at an annual pace of 1.5 per cent in the second quarter, far short of the 2.5 per cent rate needed to keep the unemployment rate stable.
The private sector again accounted for all the job gains, adding 172,000 new positions. Government payrolls dropped by 9,000, as cash-strapped local governments laid off teachers.
Construction employment dipped 1,000, despite a rise in home building. Manufacturing payrolls increased 25,000, largely because of fewer layoffs in the auto sector as manufacturers kept production lines running during the month.
Within the vast services sector, employment gains were fairly widespread. From retail to professional and business services, employers added workers.
Temporary help services increased 14,100 after rising 21,100 the prior month. But hiring in the utility sector was restrained by a strike at a power firm in New York last month.
Average hourly earnings increased two cents last month, suggesting consumer spending will struggle regain steam after it slowed sharply in the second quarter.
The average workweek was unchanged at 34.5 hours.