Rise in jobless toll knocks hopes of US recovery

Hopes of a US economic recovery received a knock yesterday as it emerged that companies had continued to lay off workers in July.

Hopes of a US economic recovery received a knock yesterday as it emerged that companies had continued to lay off workers in July.

The number of workers on US payrolls dropped 44,000, the government said, in contrast to expectations for a rise of 18,000. The news took the shine off a swath of positive news from elsewhere in the US economy and from the UK and the eurozone.

The markets reacted badly to the news, pushing stock prices, the dollar and bond yields down in disappointment at the failure of the economy to create jobs. Separate figures showed a fall in the unemployment rate - the first in a year - was caused by an exodus of people from the labour force, not by any surge in hiring.

The government said 556,000 departed the jobs market, the biggest drop since May 1995, suggesting that recent job seekers have abandoned their search. The biggest drop in payrolls was in manufacturing, where 71,000 lost their jobs, marking three unbroken years of redundancies in the beleaguered sector. The latest blow came despite evidence from the closely watched ISM survey that factory output had risen for the first time in 15 months.

Meanwhile, consumer confidence brightened while personal incomes and spending both posted healthy gains in June.

The White House has warned job creation is likely to be the last feature to appear in the economic recovery it believes is already under way.

It has forecast annualised GDP growth of 3.5 per cent for the remainder of the year, accelerating to 4 per cent next year. It received a boost on Thursday from figures showing that growth outstripped forecasts in the second quarter.

The financial markets have risen strongly in recent weeks but yesterday's disappointing payroll data were seen as an excuse to take profits. The Dow Jones fell almost 80 points to 9,154, while the S&P 500 and Nasdaq indices both lost ground by 0.9 per cent. The dollar weakened to $1.1274 per euro from $1.1234 on Thursday, its first drop in five days.

"Under the surface, just about the whole report was bad news for the second-half bounce-back theory," said Ian Morris, US economist at HSBC. The news dragged down markets in the US and Europe despite an improvement in the health of the manufacturing sectors of both economies.

UK factory activity expanded for the first time this year in July, with accelerating growth both in orders and output, according to the Chartered Institute of Purchasing and Supply. Meanwhile more manufacturers in the eurozone won new business and there are signs that the sector could return to growth as early as September, according to an equivalent survey of the 12-nation bloc.