US employment surprise

The US economy has had a record expansion

The number of jobs in the US economy fell in July, for the first time in more than four years.

The US Labor Department reported that the number of non-agricultural jobs dropped 108,000, largely as a result of the mass lay-off of temporary census workers.

It is a very positive report from the point of view of the markets and the Fed

Bill Cheney, economist

The overall unemployment rate stood unchanged at 4%.

The other closely watched figure released by the Labor Department was average hourly earnings, which increased 0.4% in July. Economists had forecast a 0.3% rise.

The US central bank, the Federal Reserve, has been increasing interest rates over the past year in an effort to slow the economy down and avoid the growth of inflation.

'Slowing down'

Any signs that its actions are having an effect reduces the likelihood of a further rise at its August meeting.

What economists want to see is a growth level for the US economy that does not cause inflation - the so-called Goldilocks economy, not too hot and not too cold.

It doesn't show the excessive strength that would raise serious inflation fears, but at the same time it isn't so weak that it would raise fears on the downside

Robert Dederick, economist

The fear has been that with unemployment at near-30 year lows prices will be forced up.

Essentially the theory is that employers will be forced to increase wages to attract staff, and will then have to increase prices to cover their larger costs.

"This is just what the doctor ordered," said Robert Dederick, chief economist at Northern Trust. in Chicago.

"It doesn't show the excessive strength that would raise serious inflation fears, but at the same time it isn't so weak that it would raise fears on the downside."

Stocks higher

Bill Cheney, chief economist at John Hancock Financial Services, added: "It is a very positive report from the point of view of the markets and the Fed.

"It is definitely weaker than I had expected. This does seem to be consistent with the story that the economy is slowing down."

July was the first time since January 1996 that there was a fall in jobs.

The private sector did create 138,000 jobs, although that was sharply down on the 242,000 created in June.

But the figures were dominated by the departure of 290,000 temporary Government workers who had been hired for Census 2000.

The fall in overall job numbers was in sharp contrast to economists' expectations that 58,000 jobs would be added to payrolls in July.

The signs that the economy may be avoiding over-heating helped US stock markets to get off to a bright start in the first few minutes of Friday trading.

The upbeat mood continued for most of the day, with the Dow Jones Industrial Average ending 61 points higher at 10,767, and the Nasdaq 27.5 points higher at 3,787.