U.S. Payrolls Grow Solidly

U.S. employers added a healthy 207,000 net new jobs in July, the government said Friday in a report cited as evidence that the economy’s momentum from the spring was carrying into the second half of the year.

The job gains were enough to keep the unemployment rate at a 40-year low of 5%. In addition, the Labor Department lifted its estimates of job growth for the previous two months by a combined 42,000.

“The economy is on the cusp of a significant acceleration,” Goldman Sachs said in its weekly economic wrap-up.

UBS chief economist Maury Harris said the job report suggested that the economy was growing faster than a 4% annual rate in July, compared with the 3.4% pace it registered in the April-to-June period.

The increase in jobs and the steady unemployment rate “are proof positive that the economy is still operating at full employment,” said Richard Yamarone, an economist with Argus Research Corp. He read the new employment numbers as supporting more-modest growth of 3.2%.

In another sign of economic strength, workers earned more in July. Production workers made an average of $16.13 an hour, up from $16.07 in June. That was the largest such increase since February 2003.

Mark Zandi, chief economist of the consulting firm Economy.com, called the pay gains “a sign that workers are gaining some negotiating power” as the pool of available workers shrinks. That, in turn, is likely to prompt businesses to raise prices, he said, which could potentially trigger an inflationary wage-price spiral.

Zandi predicted that the Federal Reserve’s Open Market Committee, which has raised short-term interest rates one-quarter of a point at each of its last nine meetings -- to 3.25% now -- would stop only when it got to 4.5% or 5%. The committee meets Tuesday.

Yamarone also predicted that “it will be onward and upward for the Fed’s tightening cycle.”

Concern about Fed tightening helped spark a rise in bond market yields Friday, which in turn will push mortgage rates and other interest costs higher.

Other analysts said the new job data did not foreshadow higher inflation.

Moody’s Investors Service said the report “was constructive for both the economy and corporate earnings.” Personal income is growing fast enough that people will make more purchases, Moody’s said. Businesses, in turn, will be able to maintain profits without raising prices, it said.

The average workweek remained steady at 33.7 hours, “a sign of caution among employers,” said Steven Wood, chief economist at Insight Economics.

The manufacturing sector underperformed the rest of the economy, as is often the case. Hours worked at manufacturing companies declined for the fifth month in six, said Charles W. McMillion, chief economist for MBG Information Services.

He noted that the heftiest employment gains in July were in categories that, unlike manufacturing, don’t rely heavily on outsourcing. They included healthcare, restaurants and bars, schools, clothing stores, department stores, real estate and car dealerships.

Bernard Baumohl, executive director of Economic Outlook Group of Princeton Junction, N.J., said the economy faced a 25% risk of a recession next year and a significant risk of a so-called growth recession as a result of rising interest rates, energy prices and consumer debt. The economy keeps growing during a growth recession but too slowly to prevent unemployment from rising.

Although the economy has generated nearly 4 million net new nonfarm jobs in the last two years -- a pace of about 165,000 a month -- total nonfarm employment is only 133.8 million, or 1.4 million more than when President Bush took office in January 2001. Federal, state and local governments are responsible for about two-thirds of the new jobs during the Bush administration.

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Strong gain

Number of jobs gained in July in selected industries

(In thousands)

Retail: 50

Food and drink: 30

Healthcare: 29

Professional, technical services: 23

Financial activities: 21

Source: Bureau of Labor Statistics

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Times staff writer Warren Vieth contributed to this report.