Jobless rate highest in 4 years, payrolls drop

By Glenn Somerville

WASHINGTON (Reuters) - The U.S. unemployment rate hit its highest in four years during July as employers cut jobs for a seventh straight month, though less severely than predicted, a Labor Department report showed on Friday.

The rising toll of job losses and plunging new-car sales in July fueled worry that a recession may be unavoidable and helped drive stock prices lower again.

The jobless rate climbed to 5.7 percent from 5.5 percent in June as 51,000 jobs were eliminated in July, bringing losses for the year to 463,000. Economists had expected 75,000 jobs would be cut last month but had forecast the unemployment rate would rise only to 5.6 percent.

In a separate report, the Institute for Supply Management said manufacturing activity held steady in July and noted some moderation in inflation pressures. Its index of national factory activity slipped a bit to 50 from 50.2 in June -- with 50 being the dividing line between expansion and contraction.

"If you look at ISM and the unemployment number together, it suggests an economy that is, at best, stuck in neutral," said Subodh Kumar, chief investment strategist with Subodh Kumar & Associates in Toronto.

Stock prices dropped, with the Dow Jones industrial average off 51 points to end at 11,326 and the Nasdaq Composite Index down 14 points to 2,310. Prices for U.S. Treasury debt securities rose moderately as investors sought safer haven.

In an interview with Reuters, U.S. Commerce Secretary Carlos Gutierrez said economic stimulus payments that are being sent out to qualifying Americans should bolster the economy but wouldn't predict when more jobs would be created.

JOB PICTURE CLOUDED

"I won't speculate," he said. "But we are forecasting continued growth in the economy for the back half of the year and it will be that growth that will determine a return to job creation."

But consumers, whose purchases fuel two-thirds of national output, appeared to be frightened by soaring energy and other costs and by tightening credit conditions.

Sales of new cars by General Motors Corp. plummeted 27 percent in July from year-earlier levels, Ford Motor Co. sales fell 15 percent and Toyota Motor Corp. was off 12 percent. GM lost a staggering $15.5 billion in the second quarter.

In St. Petersburg, Florida, Democratic presidential candidate Barack Obama called for new measures, including $25 billion of spending on infrastructure projects like roads.

"With job losses mounting, prices rising, increased turbulence in our financial system, a growing credit crunch, we need to do more," Obama said at a town hall meeting.

The Labor Department trimmed estimates for job losses in both May and June. It said a total of 26,000 fewer jobs were lost in the two months than previously thought.

Policy-makers at the Federal Reserve meet next week and are expected to keep official interest rates unchanged as they weigh concerns about economic weakness against worries about bubbling price pressures.