Unemployment falls unexpectedly as jobs still lost

WASHINGTON -- The nation's unemployment rate unexpectedly dropped to 5.6 percent in September, even as the economy lost jobs for the first time in five months, highlighting the difficulties some workers and businesses are confronting given the uneven economic recovery.

The latest snapshot of the country's employment situation, released by the Labor Department Friday, offered a mixed picture of the jobs market as well as the national economy.

But economists said that at least one clear theme emerged from the report: The economy, after being knocked down by last year's recession, is back on its feet, but sure isn't bursting with vitality.

"The economy continues to display significant divergence between parts that are doing well, such as parts of the service sector, and parts that are suffering -- notably manufacturing," said Lynn Reaser, chief economist at Banc of America Capital Management. "There's a big split in terms of winners and losers," she said.

On Wall Street, concerns about the economy and earnings warnings from EMC and Schering-Plough sent stocks tumbling. The Dow Jones industrials fell 188.79 points to close at 7,528.40, the lowest finish in nearly five years.

Lowest in months

September's 5.6 percent jobless rate -- down from 5.7 percent in August -- represented the lowest unemployment rate in seven months. But a big part of the hiring benefited teenagers. The jobless rates for adult men and women held steady.

Business and government, meanwhile, reported that they cut 43,000 jobs in September, with job losses in manufacturing, transportation and retail swamping job gains in health care, finance and real-estate.

The unemployment rate and the payrolls data can move in different directions in a given month because they are based on two different statistical surveys. The jobless rate is based on a survey of 60,000 households in the United States. The payroll figures come from information supplied by roughly 300,000 businesses.

Economists weren't happy to see payrolls shrink by 43,000 in September, but revised data showing much stronger job gains in August took some of the sting out of September's job cuts, economists said. Friday's report showed that payrolls grew by 107,000 in August -- nearly three times more than the government previously estimated.

Also somewhat encouraging was the fact that the average number of hours worked in a week increased to 34.3 hours in September, up from 34.1 hours in August. Economists said that's a good sign for future job growth because employers often increase hours for existing workers before they add new jobs.

And, in another encouraging development, workers' hourly wages in September grew to $14.87 an hour, representing a 3 percent increase from the same month a year ago. Economists said that bodes well for continued spending by consumers, the economy's main engine.

Consumers, whose spending accounts for two-thirds of all economic activity in the United States, have been the primary force behind economic growth this year.

Extra spending cash

Low interest rates, rising home values and a refinancing boom that has left people with extra cash have supported spending this year. That has helped to blunt negative factors such as the lackluster jobs market, the rollercoaster stock market and eroding consumer confidence.

Economists said the drop in the jobless rate in September might give consumers a psychological boost and stabilize their confidence in the economy. But they cautioned against reading too much into the decline. "It still cannot be said that the labor market is in great shape," said economist Joel Naroff of Naroff Economic Advisors. "You have good news and bad news all around."

One of the biggest trouble spots for the economy has been companies' reluctance to make commitments in capital spending and in job creation, factors restraining the recovery.

Economic uncertainties, including worries about a possible war with Iraq, are weighing heavily on businesses, whose profits took a hit during the recession and have yet to recover. Economists say a sustained turnaround in capital investment is a necessary ingredient for the economy to get back to full health.

The economy's weakest link is manufacturing, economists said. Factories lost 35,000 jobs in September, marking the 26th straight month of job losses. At transportation companies and public utilities, 32,000 jobs were cut and retailers eliminated 16,000 positions in September.

But health-care services added 21,000 jobs and employment in finance, insurance and real estate grew by 16,000 during the month.

Given the mixed signals offered in Friday's employment report, some economists believe the Federal Reserve will cut interest rates for the first time this year at its next meeting on Nov. 6. But others believe the Fed will leave rates alone.

"Today's report should ease concerns about a possible double-dip recession," said David Huether, chief economist at the National Association of Manufacturers.