Aug. 6 (Bloomberg) -- U.S. job growth unexpectedly slowed for a fourth month in July, showing an economic slump may have extended into the third quarter. Treasury notes surged on speculation the Federal Reserve may delay interest rate increases.

The gain of 32,000 jobs was about an eighth of the median forecast in a Bloomberg News survey, and employment was revised lower for May and June, the Labor Department said in Washington. No one in the survey predicted fewer than 170,000 jobs.

``The jobs-making machine is really stuck in the mud -- we can shave our forecasts for the economy for the second half,'' said Joseph Keating, who oversees $25 billion as chief investment officer at AmSouth Asset Management in Birmingham, Alabama.

The economy slowed last quarter as higher gasoline costs caused consumers to spend less on other goods and services. Democratic presidential candidate John Kerry said the weaker than expected payroll report shows President George W. Bush's economic policies aren't working. Bush's advisers focused instead on a decline in the unemployment rate to 5.5 percent, the lowest since October 2001, from 5.6 percent in June, based on today's separate Labor Department households survey.

Fed policy makers, who are forecast on Tuesday to raise their overnight bank rate a quarter point to 1.5 percent, may be more reluctant to raise rates at their three other meetings if the slowdown continues. The Fed raised its rate for the first time in four years in June to keep inflation from flaring.

Fed Policy

``I have little doubt that the Fed will raise rates by 25 basis points next week,'' said Stephen Stanley, chief economist at RBS Greenwich Capital in Connecticut. ``The odds of moves in September and beyond have obviously diminished today.''

In the survey of businesses used for the payrolls report, job gains were revised lower for the preceding two months, to 78,000 for June and 208,000 in May, or 61,000 less than originally stated by the Labor Department.

The benchmark 10-year note's yield, which moves inversely to its price, fell to the lowest since April and the Standard & Poor's 500 stock index reached its lowest close since Dec. 10. The Treasury note maturing in May 2014 rose 1 15/32 point, pushing down the yield 18 basis points to 4.22 percent at 5 p.m. The S&P 500 Index fell 16.73 points, or 1.6 percent, to 1063.97.

Against the euro, the dollar fell 1.9 percent, its biggest one-day drop since April 2001, to $1.2288 at 4 p.m. in New York. Gold futures rose in New York rose above $400 an ounce for the first time in two weeks after the plunge in the dollar made the precious metal cheaper for buyers using euros and yen.

Forecasts

Economists predicted payrolls would rise by 240,000 last month, the median of 74 forecasts in a Bloomberg News survey, following a previously reported 112,000 increase in June. They projected the unemployment rate would hold at 5.6 percent. Estimates ranged from 170,000 to 350,000. The U.S. now has added 1.2 million jobs this year.

``This means the mid-year soft patch is going to extend for the next three months,'' said Richard Yamarone, chief economist at Argus Research Corp. in New York. His forecast of 170,000 was the lowest in the Bloomberg survey. Terrorism fears and high oil prices have made companies ``hesitant to hire,'' he said.

Employment in service-producing industries, including retailers, banks and government agencies, rose 14,000 last month, the fewest since August, after a 76,000 gain in June, according to the Labor Department. Professional and business services and education and health services were the only categories that increased.

Manufacturers gained 10,000 jobs last month, resuming growth after a revised decline of 1,000 in June.

The July payrolls number ``doesn't justify what we're seeing in the marketplace,'' said Jeffrey Joerres, chairman and chief executive officer of Manpower Inc., the world's No. 2 provider of temporary workers. ``When we talk to CEOs or heads of human resources, they're looking at their book of business and seeing that it's good.''

Campaign Issue

The pace of employment gains and the quality of the jobs added has become a main issue leading to November's election. Factory jobs are concentrated in many of the most closely contested states, including Ohio and Pennsylvania.

``This is clearly something that will rock Bush's re-election campaign, at least in the short term,'' said Mitchell Stapley, who manages $12 billion in fixed-income assets as the chief investment officer at Fifth Third Advisors in Grand Rapids, Michigan.

Kerry, a four-term Massachusetts senator, blames Bush for a net loss of 1.1 million jobs since he took office and says those that have been created pay less than those lost. Bush, 58, and Kerry, 60, are in statistical ties in national opinion polls including those by Marist College, the American Research Group and ABC News/Washington Post.

A `U-Turn'?

``Today's job numbers further demonstrate that our economy may be taking a U-turn,'' Kerry said in a statement released in Kansas City, Missouri. ``America will not turn the corner to better days until we have a new president who can see our problems and take action to fix them.''

Bush's top economic advisers focused on the job gains shown in the Labor Department survey of households, which the government uses to calculate the unemployment rate. Employment grew by 629,000 jobs in that report, outstripping the 577,000 increase in the number of people in the labor force, thereby causing the unemployment rate to fall.

Bush, speaking at minority journalists conference in Washington, today said his tax cuts have helped the economy and that ``growth is strong and getting stronger.''

``We're not satisfied,'' Treasury Secretary John Snow told reporters after a speech in Pittsburgh. ``We're encouraged, though, by the fact that the unemployment rate came down. That's good news.''

Wages and Income

John Ryding, chief U.S. economist at Bear, Stearns & Co. in New York, said he does ``not think that this report marks a weakening in the economy.'' The Fed will likely raise rates next week and end the year at a 2 percent fed funds rate, he said.

``It is difficult to put too much weight on the employment data when there is a divergence of almost 600,000 between the two measures of job creation in July,'' Ryding said.

The manufacturing workweek rose to 40.9 hours from 40.8 in June and overtime rose held at 4.6 hours for a third month. Average weekly hours worked for all employees rose to 33.7 from 33.6 the month before. Economists predicted hours would rise to 33.8 from an originally reported 33.6 in June, according to a Bloomberg News survey.

Incomes rose last month. Workers' average hourly pay rose 0.3 percent, or 5 cents, after a 0.1 percent increase in June. Economists had expected a 0.3 percent increase in hourly wages, according to the Bloomberg survey. Average weekly earnings rose to $529.09 in July from $525.84 the month before.

Consumer Spending

``Given that wages are not rising too quickly and that the stimulus from having lower interest rates and tax cuts are now in the rear-view mirror, we expect consumers to start saving more of their income,'' said Andrew Tilton, an economist at Goldman Sachs in New York.

Spending by U.S. consumers fell 0.7 percent in June, the first decline in nine months, as auto sales declined and income growth slowed, the Commerce Department said Tuesday. Incomes rose 0.2 percent after rising 0.6 percent in May.

Fed Chairman Alan Greenspan said in testimony before Congress on July 20 that the slowdown in consumer spending was due to higher prices and ``should prove short-lived.''

Chain-store sales rose 3.1 percent last month, trailing June as the second-weakest report this year, the International Council of Shopping Centers said yesterday. Other figures suggest a rebound in July spending. Sales of cars and light trucks rose to a 17.3 million annual rate last month from 15.4 million in June.

The Conference Board's measure of consumer confidence rose to 106.1 last month as participants said it became easier to find jobs and believed employment gains would pick up.

Employers

``We are hiring workers, and have been for some time,'' said Douglas Duncan, chief executive at FedEx Corp.'s FedEx Freight division in an interview Monday. ``Freight demand right now is very good. We serve the industrial sector, but we also are a very heavy supplier to the retail sector, and frankly, we see growth and strength across all of those segments of the economy.'' FedEx is the world's largest overnight delivery company.

Other companies say they are able to grow without adding to their head count.

``We have had great productivity increases running at 7 percent, 8 percent the last two years,'' Dieter Zetsche, chief executive of DaimlerChrysler AG's Chrysler division, said in an interview Wednesday. ``You need considerably more volume to offset that before you can hire people. Flat employment is what we expect to happen based on considerable growth for us and ongoing productivity gains.''

Growth Forecast

The economy grew at a 3 percent annual rate in the second quarter, the slowest in more than year, as rising energy prices cut into consumer spending, the government said last week. The pace of growth may pick up this quarter and average 4.5 percent this year, the most since 1999, according to the median survey in a separate Bloomberg News survey.

Among blacks, the unemployment rate rose to 10.9 percent from 10.1 percent in June. The jobless rate for Hispanics increased to 6.8 percent from 6.7 percent and for whites fell to 4.8 percent from 5 percent.

For teenagers, unemployment rose to 17.6 percent last month from 16.8 percent. The jobless rate for both women and men fell to 4.9 percent from 5 percent.

To contact the reporter on this story: Courtney Schlisserman in Washington at cschlisserma@bloomberg.net.

Last Updated: August 6, 2004 17:02 EDT