WASHINGTON – Employers put the brakes on hiring last month, adding a scant 32,000 jobs to their payrolls, the government said Friday in a report that roiled the presidential race.

The small job-creation figure fell far short of what economists and financial markets had expected and raised new questions about the ongoing strength of the economic recovery amid a summertime “soft patch” and high oil prices that have made companies more cautious.

The employment report drove a weakening stock market further downward, with the blue-chip Dow Jones industrial average falling by 147.70 points. It could cause the Federal Reserve to rethink the pace at which it plans to increase interest rates.

Not all the news was negative. The national unemployment rate dropped from 5.6 percent to 5.5 percent in July, but that number is calculated from a separate household survey that even the Labor Department said is not as reliable as payroll numbers.

The payroll report dealt a setback to President Bush’s re-election campaign and gave Democrats new ammunition to attack Bush’s economic stewardship only three months before the election. It triggered a frenzied August campaign debate over jobs.

Bush said the economy is still strong but that he won’t be satisfied until every American who wants to work has a job. His Democratic opponent, Sen. John Kerry, citing the president’s recent statements that the economy is turning the corner, said, “It must have been a U-turn.”

The Labor Department also said employers added 78,000 payroll jobs in June, down from the previously reported 112,000 new jobs. During a blazing first quarter, employers strongly boosted their payrolls, but the hiring lost steam as summer arrived.

The payroll report is seen as reliable because it includes actual hiring by 160,000 businesses and government agencies covering 400,000 individual work sites. By contrast, the household survey estimates employment through a sample of 60,000 households nationwide.

Oddly enough, one of the most battered sectors of the economy, manufacturing, was among the strongest last month, with payroll jobs rising by 10,000. Construction showed only a 4,000 employment gain, while the retail trade sector registered a 19,000 job loss in July, as many stores cut their payrolls.

The financial industry reduced payrolls by 23,000 people, partly because of the fall in mortgage refinancing, according to Peter Kretzmer, economist for the Bank of America. Professional services jobs – such as legal, engineering and administration positions – increased by 42,000 and health care jobs were up 20,000.

The employment report packs a greater political and economic punch than other statistics. Before the Nov. 2 election, the government will release the August and September employment reports. Both could influence the presidential race.

Political analysts say the direction of the economy on Election Day can often carry more weight with voters than the actual level of jobs and business.

Republicans put a positive spin on the numbers, saying the economy has responded to Bush’s tax cuts and is still growing. Democrats said the United States is creating lower-paying jobs, and not enough of them to make a significant dent in the jobless rate.


“Our economy has been through a lot,” Bush said at a rally in Stratham, N.H. “Today’s employment report shows our economy is continuing to move forward. And it reminds us that we’re in a changing economy and we’ve got to do more.”

Republicans also pointed out that the household survey showed a 629,000 increase in jobs in July, many times more than the payroll survey, even though the household figure is considered less reliable.

Kerry said the economy wouldn’t turn the corner “until we have a new president who can see our problems (and) take action to fix them.”


Economists blamed the slowdown in job creation on a sudden business caution that they said arose from surging oil prices and geopolitical and other uncertainties. Now, they said, companies have returned to trying to expand by getting more work out of their existing labor force.

“There is a great hesitation about new hiring,” said Pierre Ellis, an economist with Decision Economics, a New York consulting firm. “But at the same time there is not a significant increase in the firing of people.”

Lyle Gramley, a former member of the Federal Reserve Board, added: “This not a strong report at all. It indicates the weakness that began late in the second quarter is spilling over into the third.”

The government reported last week that the economy slowed markedly in the April-June quarter, though economic growth still remained at a respectable 3 percent.

The economy has gone through similar “soft patches” during previous recoveries, Gramley said, and easily could pull out of the current slowdown if oil prices stabilize and other business uncertainties ease.


And while Democrats went on the attack for the paltry job numbers in July, Gramley said that better economic numbers in recent weeks could indicate that the August jobs numbers would show a significant rebound. Ellis said conditions are ripe for a solid increase in hiring in the months ahead.

But John Silvia, economist at Wachovia Securities, said the economy could be sinking back into a “jobless recovery” in which companies find they can continue to produce goods and services “by making more intensive use of their existing work forces.”

He speculated that the hiring slowdown began as companies begin to see their energy costs rise and turned to controlling labor costs as a way to bolster their bottom lines.

Echoing other analysts, Bill Hummer, chief economist at Wayne Hummer Investments in Chicago, said he expected the Federal Reserve would still raise short-term interest rates by one-quarter of 1 percent when it meets on Tuesday. But he added the central bank might forgo another hike when it meets in September if the economy still is soft.

The central bank has decreed a “measured” pace of interest-rate increases from the rock-bottom rates that sparked a wave of mortgage refinancing, home buying and business investment.

(Tribune correspondent Jeff Zeleny contributed to this story.)

(c) 2004, Chicago Tribune.

Visit the Chicago Tribune on the Internet at http://www.chicagotribune.com/

Distributed by Knight Ridder/Tribune Information Services.


GRAPHICS (from KRT Graphics, 202-383-6064): Jobs creation, unemployment

AP-NY-08-06-04 1953EDT

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