Nonfarm payrolls seen flat

NEW YORK (Reuters) - Nonfarm payrolls were likely unchanged in September as a further unwinding of temporary Census jobs and layoffs at state and local governments offset a slight pickup in private hiring.

Temporary employment for the decennial Census dropped by about 77,917 between the August and September survey periods for the closely followed employment report, according to government data. But the Census drag on payrolls will probably end with the September employment report.

Labor market indicators were pretty mixed during the month, with the Institute for Supply Management's manufacturing employment gauge dipping, while its measure of employment in the dominant services sector edged up.

Although weekly claims for state unemployment benefits trended lower in September, analysts caution this may not translate into payrolls growth as claims were merely adjusting after some distortions in August. Some believe applications for extended benefits may have been incorrectly recorded as new filings.

Still, there is a chance payrolls could show their first gain since May, when employers added 432,000 jobs, boosted by Census hiring. Labor market weakness is hobbling the economy's recovery from its worst downturn since the 1930s, and Friday's employment report could determine whether the Federal Reserve will ease monetary policy further at its November 2-3 meeting.

The U.S. central bank, which cut overnight interest rates to near zero in December 2008, has already injected $1.7 trillion into the economy by purchasing mortgage-related and government bonds to push other rates down.

Fed Chairman Ben Bernanke on Monday said additional purchases "have the ability to ease financial conditions."

Friday's employment report will be the last before the November 2 mid-term elections, in which Democrats are expected to lose their grip on the House of Representatives and see their Senate majority diminish.

The unemployment rate is expected to edge up to 9.7 percent from 9.6 percent in August. The jobless rate has held below 10 percent this year, mainly the result of a shrinking labor force as discouraged people give up their search for jobs.

The Fed last month flagged deflation as a major risk, and analysts will watch hourly earnings for fresh clues on the inflation outlook. Average hourly earnings edged up in July and August, lending much needed support to consumer spending.

A modest improvement is expected in payrolls for the goods-producing industries. Despite the moderation in factory output, manufacturing employment is expected to show a marginal rise in September after August's auto industry-related contraction. Construction payrolls probably declined, reflecting the perennial troubles in the housing and nonresidential markets, after August's boost from the return of striking workers.

Services sector employment is seen edging up. Temporary help services -- seen as a harbinger of permanent hiring -- will also be watched after rebounding in August. The length of the work week could also shed more light on the labor market's prospects. The average work week has barely moved this year and is seen unchanged at 34.2 hours for a third straight month.

The government will also issue its preliminary estimate of revisions to employment in the 12 months to March.

MARKET IMPACT

U.S. stocks rallied after job losses in August came in less than expected, and a similar reaction is in the cards should Friday's report show modest gains or losses. The S&P 500 .SPX has risen above the 1,150 level, the top of the recent trading range and a clear breakout above that will signal more gains.

A weaker-than-expected report will keep U.S. Treasury debt yields at record low levels, but it is unlikely yields will drop further much unless there is a tidal wave of safety bids due to a massive sell-off in the stock market.

The U.S. dollar may benefit from a better-than-expected number, but gains should be seen as a correction with the greenback likely to remain on the back foot until next month's Fed policy meeting.

With dollar/yen hovering around the 83 level, downside for the pair is limited as investors remain on alert for yen-selling intervention by Japanese authorities. On euro/dollar, the next key level is the $1.3895 area, the 61.8 percent retracement from the pair's high reached in November to its low seen in June.

(Polling by Bangalore Unit)

(Reporting by Lucia Mutikani; additional reporting by Wanfeng Zhou, Richard Leong and Caroline Valetkevitch in New York; Editing by Leslie Adler)