Jobless rate at 5-year high

WASHINGTON (Reuters) - An unexpectedly steep 84,000 U.S. jobs were lost in August and the national unemployment rate hit a five-year high of 6.1 percent, fanning worry ahead of November's presidential vote about rising recession risks.

The eighth straight month of job cuts underlined the weakening state of labor markets and prompted back-and-forth jibes by Democratic presidential contender Sen. Barack Obama and Republican nominee Sen. John McCain about how to help.

McCain called for more job training while Obama said tax cuts for working families and aid for states was needed. The Bush administration insisted the economy was "fundamentally sound" and that an additional stimulus program was not needed.

A total 605,000 employees have been slashed from payrolls so far this year -- nearly a quarter million in the last three months alone -- which private-sector analysts said clearly implies a heightened risk of an economic contraction.

"According to our estimates, the sharp rise in the unemployment rate over the past six months translates into a recession probability of 70 percent, which is higher than in 1990-91 and 2001," said Harm Bandholz of UniCredit Markets in New York, referring to the two most recent recessions.

CALLS FOR STIMULUS

The speaker of the U.S. House of Representatives, California Democrat Nancy Pelosi, renewed a pledge to seek a second economic stimulus program to pick up from one earlier in the year that has now largely been paid out to consumers.

The intently watched Labor Department jobs report caught financial markets by surprise because the losses were above expectations and June and July cuts each were revised up. The department said a total 58,000 more jobs were lost in June and July than it had previously thought.

Stock prices initially fell but largely recovered by the close of trading because of bargain-hunting for beaten-down shares of financial companies. The Dow Jones industrial average .DJI ended up 32.73 points at 11,220.96 while the high tech-laden Nasdaq Composite Index .IXIC was off 3.16 points, at 2,255.88.

The dollar similarly fell in early trading but edged higher against the euro later in the day. Short-term interest rate futures, which little more than a month ago signaled a Fed rate hike was likely by year-end, shifted to suggest a small chance the central bank could lower borrowing costs this year.

Analysts said the bleak hiring data likely means that Federal Reserve policy-makers will feel obliged to keep interest rates low for an extended period.

"The economy is clearly deteriorating," said Gary Thayer, senior economist for Wachovia Securities in St. Louis. "We're also seeing weakness around the globe so there's less reason for the Fed to focus on inflation and more reason to focus on getting the economy back on its feet."

SUSPICIONS ABOUT RATE

August's 6.1 percent unemployment rate was up sharply from 5.7 percent in July and was the highest since September 2003.

Analysts said past experience shows that a continuing economic decline could drive the unemployment rate higher and keep it there for some time.

"Unemployment peaked at 7.8 percent in 1992 and I certainly think we could get back to those levels," said Mark Vitner, senior economist at Wachovia, who said U.S. domestic final demand was at its weakest level since the early 1990s.

Some analysts said the surprisingly big jump may have partly reflected a temporary government program extending long-term jobless benefits. The aid extension may have encouraged some people who otherwise might have dropped out of the work force to list themselves as job seekers -- which is necessary to be counted as unemployed.

The August job losses were broadly based.

Some 61,000 manufacturing jobs were lost, the most for any month since mid 2003, and 8,000 more construction jobs were cut. There were 53,000 jobs eliminated in professional and business services and 4,000 in leisure and hospitality industries.

The average hours of work remained unchanged from July at 33.7 but employers cut overtime to an average 3.7 hours per week in August from 3.8.

Only a few sectors added jobs. Government payrolls increased by 17,000 in August and education and health services businesses took on another 55,000 employees.

(Additional reporting by Ellen Freilich in New York, Editing by Andrea Ricci)

((glenn.somerville@thomsonreuters.com; +1-202-898-8377; Reuters Messaging: glenn.somerville.reuters.com@reuters.net)