83,000 Jobs Cut From U.S. Payrolls : Slump: Unemployment dips to 7.6% but experts see decline in labor force as indicating a worsening economy. Federal Reserve pushes down a key interest rate.

U.S. payrolls were slashed by 83,000 jobs last month, despite a surge of federally funded summer jobs for teen-agers, the Labor Department reported Friday. It was an ominous development for the struggling economy and for President Bush’s reelection drive.

Responding to the unexpectedly grim employment news, the Federal Reserve pumped money into the economy in an effort to nudge down the closely watched federal funds rate to help stop the slide. The drop in employment overshadowed a dip in the official unemployment rate to 7.6% from 7.7%.

The Labor Department report showed that both employment and unemployment declined because about 95,000 potential workers--mostly women--stopped looking for jobs in August and, therefore, were dropped from the official labor force.

“The employment figures confirm the impression that this economy is getting worse, not better,” said George L. Perry, director of the panel on economic activity of the Brookings Institution in Washington. “It may be getting worse faster than we thought.”

Perry said that the action of the Federal Reserve to push down the federal funds rate--the interest rate on overnight loans between banks--”is the right action but it may not be enough.”

“Non-farm payroll employment fell by 83,000 in August,” William G. Barron Jr., deputy commissioner of the Bureau of Labor Statistics, told Congress’ Joint Economic Committee. “Over the month, job losses were concentrated in manufacturing and in retail trade.”

Private jobs dipped by 167,000 last month. Manufacturing jobs, usually the highest-paid private segment, fell by about 97,000. The drop in jobs--both in the public and private sectors--was partly offset by an increase of about 100,000 in local government employment. But almost all of that gain was in temporary summer youth jobs under a program that was created in the wake of the Los Angeles riots and ended on Sept. 1.

In California, the picture was even more bleak. Unemployment increased from 8.9% in July to 9.8% last month, the highest state jobless rate since it stood at 10.3% in June, 1983. In Los Angeles County, unemployment fell to 10.7% in August, down from the nine-year high of 11.2% in July. Still, it was the second-highest monthly jobless rate in the county since 1983.

Politically, the figures came at a particularly damaging time for Bush’s reelection drive. Economists, including some who normally support Republican policies, predicted that the economy would remain weak at least until Election Day.

“This would seem to indicate that you will not see any significant improvement in employment before the election,” said Jerry J. Jasinowski, chief economist of the National Assn. of Manufacturers. “There is nothing good to say about these employment numbers because they show an unusual decline in employment during the summer and reflect that the only manufacturing growth was some modest growth from exports.”

Nevertheless, the White House and the Bush campaign sought to put the best possible face on the figures.

The campaign sent “talking points” to high-ranking Republicans describing the report as an indication “that the economy continues to recover.”

“More Americans are looking for work,” the paper said. “And with good reason, because more Americans are finding work. Today’s drop is the second month in a row in which unemployment is dropping.”

However, the Labor Department report contradicted the campaign statement on two significant points. Fewer Americans were looking for work in August and fewer people found jobs. The official jobless rate did decline for the second month in a row, but it stood just 0.2 percentage points below the 7.8% rate in June. The total number of unemployed persons was about the same in August as it had been in June, but the number of people looking for work was a bit lower last month than it was in June.

“The August drop in the unemployment rate, for the second month in a row, is an encouraging sign that the economy is improving,” White House Press Secretary Marlin Fitzwater said. “But we cannot be satisfied until every American who wants a job has one.”

On Capitol Hill, Democrats said that the figures provided proof of the failure of the Administration’s economic policy.

“I don’t think Fitzwater’s going to understand this problem till he hits the unemployment line himself and in about 60 days there’ll be a chance for that,” Sen. Donald W. Riegle Jr. (D-Mich.) said.

Sen. Paul S. Sarbanes (D-Md.) said that the report provides “striking evidence that the frail condition of the American economy continued through the month of August.”

“For a long time Americans have expected their incomes to improve over their lifetime,” said Sarbanes, who is chairman of the Joint Economic Committee. “And they have expected their children to do better than they’ve done. These expectations are not now being met. And they’re not likely to be met if the current economic trends continue.”

George Stephanopoulos, communications director of the Democratic presidential campaign, said: “Today, the Bureau of Labor Statistics . . . told us that 83,000 private sector jobs were lost during the Bush Administration. Arkansas has created more private sector jobs under Bill Clinton than in the rest of the United States under George Bush.”

In his appearance before Sarbanes’ committee, Barron said that almost all of the modest increase in the overall unemployment rate since June was attributable to temporary summer youth jobs, financed under a program that the Administration originally opposed but eventually agreed to support.

The psychological impact of the drop in total payroll jobs was magnified because most analysts had predicted in advance of the report that it would show an increase in employment of as many as 200,000 jobs.

The only good news in the report was an increase in the average weekly hours of workers in private employment to 34.7 in August from 34.3 in July.

Frank McCormick, a vice president and senior economist for Bank of America in San Francisco, said that the increase in the workweek is encouraging. But he added: “It would appear that businesses are a bit on the pessimistic side, because they are not hiring workers but they are working their workers longer. This indicates uncertainty on the part of businesses.”

Although there was no official announcement, analysts said that the Federal Reserve began to pump money into the banking system in an effort to drive down from 3.25% to 3% the federal funds rate, the interest that banks charge each other for overnight loans required to keep them in compliance with Federal Reserve requirements. Although the rate has no direct impact on the interest businesses and consumers must pay for loans, it is considered a key indicator of monetary policy.

“The Federal Reserve is very concerned about the recovery,” said Lynn Reaser, an economist for First Interstate Bancorp in Los Angeles. “This report indicates that the economy is at risk of again stalling out.”

Reaser said the cut in interest rates could further weaken the already weak dollar on overseas markets, but she said that the U.S. currency “seems to have weathered the storm,” at least for now.

Times staff writer Stuart Silverstein in Los Angeles contributed to this story.

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Reaction to the Jobless Figures

WHITE HOUSE: “The drop in unemployment “is an encouraging sign that the economy is improving.” Congress should pass Bush’s economic revival program “to spur economic growth and ensure an even stronger recovery.”

--Press Secretary Marlin Fitzwater

THE DEMOCRATS: “Underneath (the drop in the jobless rate) you see, there was an actual reduction of 167,000 people employed in the private sector. If it weren’t for the summer jobs programs, unemployment would have gone up again this last month.”

--Bill Clinton

THE ECONOMISTS: “This is an economic sucker punch. This thing came out of the blue while we were looking the other way.”

--Robert Brusca, Nikko Securities

“America is being forced by powerful competitive pressures to get its act together, and that means cost-cutting, shedding jobs and efficiency.”

--Stephen S. Roach, Morgan Stanley & Co.