Payrolls likely fell again in July

Employment probably fell for a second straight month in July as more temporary census jobs ended and private hiring remained too weak to boost a fragile economic recovery, according to a Reuters survey.

The survey of 75 economists forecast nonfarm payrolls dropped 65,000 after declining 125,000 in June. Private-sector hiring, considered a better gauge of labor market health, is seen rising 90,000 after increasing 83,000 in June.

The Labor Department will release the employment report at 08:30 a.m. EDT.

The unwinding of hiring for the decennial census was also a drag on employment in June and analysts expect the distortion to continue through August. According to government data, temporary census jobs fell by 144,000 between the June and July survey periods for the employment report.

It (the report) would be moving in the right direction, but this is still a much weaker jobs recovery than we thought would occur at this point, said Marisa Di Natale, a director at Moody's Economy.com in West Chester, Pennsylvania.

There is a lot of weak economic news out there and we need a turnaround in a bunch of different indicators to really confirm that the economic recovery is on a firmer footing.

Job growth has taken a step back after fairly strong gains between February and April, putting in jeopardy the economy's recovery from its worst downturn since the 1930s.

Friday's employment report is also expected to show the unemployment rate rising to 9.6 percent from 9.5 percent in June.

Growing unease over the health of the economy is weighing on President Barack Obama's popularity and hurting the Democratic Party's prospects of keeping control of Congress in November's mid-term elections.

FED WATCHING LABOR MARKET

The state of the labor market is one of the factors that will determine the timing of the Federal Reserve's first interest rate rise since reducing overnight lending rates to near zero in December 2008.

Fed Chairman Ben Bernanke has said the U.S. central bank could take steps to further ease monetary policy if the recovery were to falter. The central bank holds its next policy-setting meeting on Tuesday.

Economic growth slowed to a 2.4 percent annual rate in the second quarter after expanding at a 3.7 percent pace in the first three months of this year.

Despite the tepid private sector jobs growth, the pace of layoffs has moderated significantly from the first quarter of last year, when employers were culling an average of 752,000 jobs a month.

Analysts said the pullback in hiring was a reflection of the end of some government stimulus programs, including a popular homebuyer tax credit, as well as the European sovereign debt crisis, which hurt both business and consumer confidence.

In the face of sluggish domestic demand, businesses were also opting to invest in equipment and technology to boost productivity rather than increase their workforces, they said.

The demand picture hasn't strengthened enough for them to take on more workers, eventually that will change, said Jay Feldman, an economist at Credit Suisse in New York.

As the recovery matures they will have to have more workers, we have not reached that point yet.

Last month, employment gains in the dominant service sector likely continued after June's increase of 91,000. Analysts will be watching temporary help services, which is seen as a harbinger of future permanent hiring, after job gains slowed somewhat in June.

Payrolls in the goods-producing sector probably fell for a second straight month in July, reflecting mining layoffs related to a moratorium on deep water oil drilling and home construction job losses.

However, manufacturing employment likely increased again in July. The sector is leading the economic recovery, which started in the second half of 2009. The Institute for Supply Management's gauge of manufacturing employment rose in July after pulling back the prior month.

State and local governments, struggling with huge budget deficits, likely purged more workers last month. Analysts reckon government payrolls could shrink by as much as 175,000 in July after dropping 208,000 in June.

They will also watch the average workweek for clues on the health of the labor market after weekly hours slipped in June. The workweek is expected to have remained unchanged at 34.1 hours in July.

(Reporting by Lucia Mutikani)