By Lucia Mutikani WASHINGTON (Reuters) - U.S. job growth slowed in July and an unexpected rise in the unemployment rate pointed to some 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.
Data for May and June were revised to show a total of 15,000 more jobs created than previously reported, showing underlying momentum and taking some of the sting from the report.
U.S. stock index futures pared losses on the report, while the dollar fell to a session low against a basket of currencies. U.S. Treasury debt yields dropped.
"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.
July marked the sixth straight month that employment has expanded by more than 200,000 jobs, a stretch last seen in 1997. The one tenth of a percentage point increase in the unemployment rate to 6.2 percent came as more people entered the labor market, a sign of confidence in employment prospects.
Average hourly earnings, which are being closely monitored as a potential signal of reduced slack that could prompt the Fed to raise rates, rose only one cent.
That left the annual rate of increase at 2.0 percent, still well below the levels that would make Fed officials nervous.
Fed officials on Wednesday cautioned that "significant" slack remained, signaling patience on the rate front.
A separate report from the Commerce Department showed inflation retreating in June. A price index for consumer spending, excluding food and energy, edged up 0.1 percent after gaining 0.2 percent in May.
The core personal consumption expenditures price index, which is the Fed's preferred inflation measure, increased 1.5 percent in the 12 months through June, still below the central bank's 2 percent target.
Most economists look for the first interest rate increase in the second quarter of next year. [ECILT/US] The Fed has kept benchmark interest rates near zero since December 2008.
STILL GROWING
Economists polled by Reuters had expected payrolls to increase 233,000 last month and the unemployment rate to hold steady at 6.1 percent.
The cooling in hiring is unlikely to change perceptions about strong economic growth in the third quarter.
"It still points to a job market and an economy that is improving, but we also have the absence of wage pressures building, which is becoming another concern for investors," said Sean Lynch, managing director of global equity and research strategy at Wells Fargo Private Bank in Omaha, Nebraska.
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.
The jobless rate has declined from a peak of 10 percent in October 2009, but much of the drop has been because Americans have left the workforce.
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.
The jobs market took a step back last month. A broad measure of unemployment that includes people who want a job but have given up searching and those working part-time because they cannot find full-time jobs edged up to 12.2 percent after hitting its lowest level since October 2008 in June.
The ranks of the long-term unemployed swelled last month, which will catch the attention of policymakers. The length of time Americans are spending unemployed also rose in July after hitting its lowest level in more than five years in June.
Job gains were broad-based in July. Services industries employment accounted for the bulk of the gains, adding 140,000 positions. That compared to 232,000 jobs in June.
Manufacturing payrolls increased for the 12th month in a row, adding 28,000 jobs in July. Construction jobs 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 Chuck Mikolajczak in New York; Editing by Andrea Ricci)