WASHINGTON (Reuters) - U.S. employers in July hired the most workers in five months, but an increase in the jobless rate to 8.3 percent kept prospects of further monetary stimulus from the Federal Reserve on the table.
Nonfarm payrolls rose 163,000 last month, the Labor Department said on Friday, breaking three straight months of job gains below 100,000 and offering hope for the ailing economy.
"As long as the unemployment rate is high, the central bank will have to consider further stimulus," said Sung Won Sohn, an economics professor at California State University Channel Islands in Camarillo, California.
While the report gave talking points to Republicans and Democrats for the upcoming general election, investors on Wall Street shrugged off the rise in the jobless rate and snapped up stocks.
The unemployment rate rose from 8.2 percent in June, even as more people gave up the search for work and a survey of households showed a drop in employment.
The Federal Reserve on Wednesday sent a stronger signal that a new round of major support could be on the way if the recovery did not pick up. The labor market has slowed after hefty gains in the winter, spelling trouble for President Barack Obama.
A recent Reuters/Ipsos poll showed 36 percent of registered voters believe Republican presidential candidate Mitt Romney has a better plan for the economy, compared to 31 percent who had faith in Obama's policies.
Both Obama and Romney used the jobs report to plead their case to America's middle-class. Obama said the Republican tax plan would hurt the middle-class.
"The last thing that we should be doing is asking middle class families who are still struggling to recover from this recession to pay more in taxes," Obama said at the White House.
Romney said the rise in the jobless rate was "a hammer blow to struggling middle-class families."
The step-up in hiring beat economists' expectations for a 100,000 gain. It suggested the slump in job growth in the second quarter was largely payback for an unusually warm winter that had brought forward hiring into the early months of the year.
"When we look at the July numbers it looks like the payback is largely behind us. It's likely that August and September will look more like July than the second quarter," said Ray Stone, an economist at Stone & McCarthy Research Associates in Princeton, New Jersey.
So far this year, job growth has averaged 151,000 per month, almost the same as the monthly average last year. This is roughly the amount needed just to keep the unemployment rate steady.
While the payrolls growth probably dampened the urgency for the Fed to act at the September 12-13 meeting, further monetary stimulus remains in the cards given the threat to the economy from a potential tightening in fiscal policy next year and the ongoing debt troubles in Europe.
The household survey offered a downbeat assessment of the labor market, with the employment-to-population ratio - the broadest measure of labor utilization - falling 0.2 percentage point to 58.4 percent.
"We think the odds are still tilted in favor of more Fed accommodation at the September meeting, and that call obviously remains contingent on economic and financial developments over the next six weeks," said Michael Feroli, an economist at JPMorgan in New York.
The labor force participation rate, or the percentage of Americans who either have a job or are looking for one, fell to 63.7 percent last month from 63.8 percent.
Data last week showed the economy grew at an annual pace of 1.5 percent in the second quarter, far short of the 2.5 percent rate needed to keep the unemployment rate stable.
U.S. stocks rallied on the report, putting the Standard & Poors' 500 index .SPX on track to recover all of the losses posted during its recent four-day losing streak.
Prices for U.S. government debt fell and the dollar dropped more than 1 percent against a basket of currencies.
The private sector again accounted for all the job gains, adding 172,000 new positions. Government payrolls dropped by 9,000, as cash-strapped local governments laid off teachers.
Construction employment dipped 1,000, despite a rise in home building. Manufacturing payrolls increased 25,000, largely because of fewer layoffs in the auto sector as manufacturers kept production lines running during the month.
Within the vast services sector, employment gains were fairly widespread. From retail to professional and business services, employers added workers.
However, the momentum could slow. A second report showed the services sector grew modestly in July as new orders rose, but a measure of employment dropped to its lowest level in nearly a year.
Last month, temporary help services increased 14,100 after rising 21,100 in June. But hiring in the utility sector was restrained by a strike at a power firm in New York last month.
Average hourly earnings increased 2 cents last month, suggesting consumer spending will struggle regain steam after it slowed sharply in the second quarter. In the 12 months to July, earnings rose 1.7 percent.
The average workweek was unchanged at 34.5 hours.
Reporting By Lucia Mutikani; Editing by Neil Stempleman