WASHINGTON (Reuters) - U.S. employers hired the most workers in five months in July, 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.
"It's a relief we did not post another number like 75,000, but the reality is it's not night and day. It's not as though it brings us all the way back to being wildly optimistic," said Robert DiClemente, chief U.S. economist at Citigroup in New York.
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 to a five-month high and boosted stocks to their highest level since early May.
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 does not pick up. The labor market has slowed after hefty gains in the winter, spelling trouble for President Barack Obama in the November election.
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 with 31 percent who have faith in Obama's policies.
Both Obama and Romney used the jobs report to plead their case to America's middle-class voters. Obama said the Republican tax plan would hurt them.
"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, which beat economists' expectations of a 100,000 gain, left economists divided on whether the Fed would ease monetary policy at its September 12-13 meeting, as had been widely anticipated before the jobs report.
"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 increase in payrolls last month was confirmation 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, economists said.
As such, this suggested that employment numbers for August could look more like July's, reducing the pressure for the Fed to take further action next month.
"That doesn't mean they are not going to go, it just means their sense of urgency for pulling the trigger and moving again is marginally less than it was," said Ray Stone, an economist at Stone & McCarthy Research Associates in Princeton, New Jersey.
Fed Chairman Ben Bernanke's speech at the central bank's high-profile gathering in Jackson Hole, Wyoming, in late August could offer clues on the near-term course of monetary policy. He used that forum in 2010 to communicate the Fed's intention to pursue a second round of quantitative easing, or QE2.
So far this year, job growth has averaged 151,000 per month, almost the same as the monthly average last year and roughly the amount needed just to keep the unemployment rate steady.
Even if the payrolls growth buys the Fed time in September, 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.
A Reuters survey published on Friday showed most Wall Street economists still expect the Fed to pump more money into the economy this year via bond purchases.
Details of the household survey, from which the unemployment rate is drawn, gave a downbeat assessment of the labor market, with the share of the population that has a job falling to near cycle lows.
In addition, 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. That is a sign of low confidence in the labor market.
Data last week showed the economy grew at an annual pace of 1.5 percent in the second quarter, also far short of the 2.5 percent rate needed to keep the unemployment rate stable.
U.S. stocks rallied on the July jobs report, helping the Standard & Poor's 500 index regain ground lost during its recent four-day losing streak.
Prices of U.S. Treasury debt fell and benchmark yields flirted with their highest levels in a month as the report undercut their safe-haven appeal. The dollar fell 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. Factory 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 on Friday 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 jobs increased by 14,100 after rising 21,100 in June. But hiring in the utility sector was weighed down 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 to 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 Andrea Ricci and Dan Grebler