INSTANT VIEW: Joblessness at 9.7 percent; payrolls fall 216,000

NEW YORK (Reuters) - U.S. employers cut a fewer-than-expected 216,000 jobs in August, while the unemployment rate rose to a 26-year high, the government said on Friday in a report showing a still fragile labor market.

KEY POINTS: * The Labor Department said the unemployment rate rose to 9.7 percent after dipping to 9.4 percent in July and the decline in payrolls was the smallest in a year. The department revised job losses for June and July to show 49,000 more jobs lost than previously reported. * Analysts had expected non-farm payrolls to drop 225,000 in August and the unemployment rate to rise to 9.5 percent. The labor force increased by 73,000 in August, indicating the return of some jobless workers who had given up looking for work accounting for part of the rise in the unemployment rate. * Since the start of the recession in December 2007, the economy has shed 6.9 million jobs, the department said. Stubbornly high unemployment is wearing on consumer confidence and crimping domestic demand, pointing to an anemic recovery from the worst slump in 70 years. Consumer spending accounts for over two-thirds of U.S. economic activity. * However, the August report confirmed the pace of layoffs was easing from early this year, when nearly three quarters of a million jobs were lost in January. * Manufacturing employment fell by 63,000, with a total of 2 million factory jobs lost since the start of the recession. Payrolls in construction industries dropped 65,000 after falling 73,000 in July. * The service-providing sector purged 80,000 workers in August, while the goods-producing industries shed 136,000 positions.

COMMENTS:

JOHN CANALLY, ECONOMIST, LPL FINANCIAL, BOSTON:

"The report is a little bit better than people thought.

"There was some good news. The median duration of unemployment dropped and that's good news. It's taking a little less time for people to find a job once they've been laid off. Also, average hourly earnings are up 2.6 percent from a year ago. That's good news. Average weekly hours didn't fall and that's good news as well.

"The tension between now and the end of the year lies in the question of whether, after the support provided by the government's stimulus package, the private sector can stop shedding jobs in time to help the economy stay on a sustainable recovery. The private sector has been losing fewer jobs and we're on a path to add jobs in the fourth quarter.

"The key takeaway is that there are fewer firings, but the private sector hasn't begun to hire."

ZACH PANDL, ECONOMIST, NOMURA SECURITIES, NEW YORK

"It's another disappointing report that suggests that the labor market is lagging the industrial sector as we pull out of recession.

"We'll be watching the consumer spending numbers very closely in coming weeks. We really need to see a pick-up in spending beyond the 'cash for clunkers' to have more confidence in a sustainable recovery, but it's too early to tell whether we may slip back into recession."

SEAN SIMKO, FIXED INCOME PORTFOLIO MANAGER, SEI, OAKS,

PENNSYLVANIA:

"The Treasury market made a U-turn. Yields are higher than where they were before the payrolls number. The 10-year continues to extend losses after you initially saw some short-covering right after the employment number.

"The initial focus was on the unemployment rate and that is what caused the knee-jerk reaction here, but in the end I think the recovery in the labor market is still moving forward. The rate of deterioration is slowing, which is positive."

T.J. MARTA, CHIEF MARKET STRATEGIST, MARTA ON THE MARKETS,

SCOTCH PLAINS, NEW JERSEY:

"The big shocker was the unemployment rate, which obviously exceeded the consensus of what the market is looking for. Signs of stabilization jobs market were premature. We are still on course for unemployment to rise through the first quarter of 2010 and when you look at unemployment continuing to rise like this, there is very little likelihood the Fed will raise rates any time prior to the second quarter of next year. I am advising clients to be long euro dollar futures out through March. It is going to keep the front-end of the Treasury curve pinned down."

DAN COOK, SENIOR MARKET ANALYST, IG MARKETS, CHICAGO:

"That's the big one -- the 9.7 percent -- that jumped out at me. Even though the headline number was a little better than expected, it's not good news. Particularly when the BLS even says a variance of 150,000 one way or another is not even a significant number. Average workweek is still about 33.1, so that tells me nobody is going to be hiring any time soon. The market may determine this as 'well the headline number is a continued drop, we're on the right trend' but the fact of the matter is we are still losing 200,000 jobs a month.

"And now we are facing something we haven't faced in a long time, which is people running out of their unemployment benefits, even the extended ones. So overall, while the headline number was positive, I think that unemployment rate is going to take a toll, 9.7 percent, even closer to that dreaded 10 percent that we've been talking about for quite some time."

BILL CHENEY, CHIEF ECONOMIST, JOHN HANCOCK FINANCIAL SERVICES,

BOSTON:

"Overall, not awful.

"It's obviously not a good thing that you have 216,000 jobs lost, but given the level of initial unemployment claims and other indicators nobody expected this to actually be turning around this month.

"I do think that it's going to be turning around fairly soon. It does seem to me that in the big picture that business fired people so rapidly and cut to the bone so much in this cycle that probably as soon as business turns up they're going to have to start hiring again.

"For a while now we've all been reconciled to the idea that the unemployment rate was probably going to hit 10 percent before it turned down and I still think that's going to be about the peak."

PHIL FLYNN, ANALYST, PFGBEST RESEARCH, CHICAGO:

"It's a mixed bag. The market initially fell back on the higher (unemployment) rate, even though the nonfarm payrolls was better than expected. But overall its a bad report; but the market has been gearing up for a bad report, with gold higher.

"I think we will take our cue from the stock market, but I don't expect much unwinding ahead of a long weekend, with the underlying concerns about the banking sector still out there."

NIGEL GAULT, CHIEF U.S. ECONOMIST, IHS GLOBAL INSIGHT,

LEXINGTON, MASSACHUSETTS:

"I would not be too discouraged about the unemployment rate. The decline last month was too good to be true, really. It's too early for the unemployment rate to be coming down, of course we're still losing jobs.

"What I would take encouragement from is the fact is the trend in the rate of decline in jobs is still improving, that private sector jobs were down 198,000, that's 50,000 better than the previous month and it's almost 200,000 better than the month before that.

"That I would take comfort from the private sector is still shedding jobs, but less rapidly."

RICHARD FRANULOVICH, SENIOR CURRENCY STRATEGIST, WESTPAC, NEW

YORK:

"This is not a good report and very bad for risk. We're seeing risk trades come off as a result. Dollar/yen has come off. The euro's knee-jerk reaction was higher, but I wouldn't put too much into. That could come down as the session goes on as risk aversion increases euro's price action could be flows-driven and not necessarily based on fundamentals."

JOSEPH TREVISANI, SENIOR MARKET ANALYST, FX SOLUTIONS, SADDLE

RIVER, NEW JERSEY

"I think it's probably overall a negative. You're not seeing any real steady improvement. The economy needs to generate jobs, and until we get near zero or go positive, it's still a tremendous drag on the economy. Losing jobs is bad for consumer spending. Overall, it's not a terrible report, it didn't jump to 300,000. But the evidence of what's going on is that we're seeing only a very slow change."

PIERRE ELLIS, SENIOR ECONOMIST, DECISION ECONOMICS, NEW YORK:

"The unemployment rate jumped mainly because employment fell sharply. The labor force did grow, but not dramatically, so it's not a major factor.

"The payroll figures which are more reliable made progress and it looks like there was a fairly decent increase in income. It certainly sustains perceptions that the economy gradually is swinging to recovery. The main pitfall would be continued weak income growth but that was not the case in August, so that's encouraging. There was a decent increase in wages and the workweek held steady, an indication of strength."

LAWRENCE GLAZER, MANAGING PARTNER OF MAYFLOWER ADVISORS,

BOSTON:

"Despite the recent improving trend in overall economic data, the high unemployment rate is still not going to sit well with most investors. These data may breathe new life into Treasuries.

"It's a negative for riskier assets, because most investors will focus on the headline (jobless rate). This is something to think about over the holiday weekend despite an overall trend of improvement in the economy."

MARKET REACTION: STOCKS: U.S. stock index futures added to gains. BONDS: U.S. Treasury debt prices fell sharply before recovering some losses. DOLLAR: U.S. dollar rose against the euro and the yen.