* Economy adds 1,800 net new jobs; forecast was for 5,000
* Unemployment rate unchanged at 7.4 percent
* Analysts had expected slower job gains
By David Ljunggren
OTTAWA, Nov 2 (Reuters) - Canadian job growth stalled in October after two months of strong hiring, Statistics Canada data showed on Friday, confirming expectations employment gains would ease to reflect sluggish economic growth.
The economy added 1,800 jobs in the month, even lower than the small increase of 5,000 jobs forecast in a Reuters poll, while the unemployment rate held steady at 7.4 percent.
Economists have argued that with the economy expanding at a rate of about 2 percent, employment growth of the magnitude seen in the previous two months was not sustainable.
"It's not too surprising to find the Canadian labor market take a bit of a breather. The underlying details are still fairly positive," said David Tulk, chief Canada macro strategist at TD Securities.
"It's consistent with growth slowing into the third quarter and then recovering slowly thereafter."
The Bank of Canada last week slashed its forecast for third-quarter growth on an annualized basis to 1 percent from 2 percent, citing a greater degree of slack in the economy.
The country created 52,100 jobs in September and 34,300 in August. Due to the volatility of the data from month to month, many analysts prefer to look at three- or six-month moving averages, which show monthly gains of 29,400 and 12,100, respectively.
Finance Minister Jim Flaherty said that although the numbers were modest, he was pleased to see the economy creating jobs.
"However, we face challenges from economic turbulence beyond our borders, especially in Europe and the United States ... there are still too many Canadians looking for work," he said in a statement.
In the United States, employers added 171,000 people to their payrolls last month as the jobless rate edged a tenth of a point higher to 7.9 percent. The government also said 84,000 more jobs were created in August and September than initially estimated.
The Canadian dollar rose to a one-week high against its U.S. counterpart. The Canadian currency traded as high as C$0.9936 to the greenback, or $1.0064. It had traded at C$0.9981, or $1.0018, just before the jobs reports were released.
"I think this one will be forgotten within about five minutes simply because the U.S. number is going to dominate here - the U.S. number was a little bit more of a surprise than Canada," said Doug Porter, deputy chief economist at BMO capital markets.
All the gains in Canadian employment in October were in full-time positions, with the number of workers in the private sector shrinking and the public sector adding to its payrolls.
The goods-producing sector lost a net 19,300 jobs, dragged mainly by agriculture. The services sector created some 21,000 positions, with the biggest gains seen in educational services.
"I'd say this number is only reflecting where we should have been ... over the last two months not only were the jobs reports stronger than consensus but they were actually stronger than the highest estimates out there. It was natural that we got a bit of a pullback," said Mark Chandler, head of Canadian fixed income and currency strategy at Royal Bank of Canada.
Canada recovered all the jobs lost during the 2008-09 recession by January 2011 and has since added another 390,000 jobs. Unemployment, however, remains stubbornly higher than the 6.1 percent rate seen just before the downturn.
Overnight index swaps, which trade based on expectations for the central bank's key policy rate, showed that traders resumed placing small bets on a rate hike in late 2013 after the U.S. and Canadian jobs data.
Bank of Canada Governor Mark Carney has said the bank is more inclined to raise interest rates than to lower them, although not any time soon.