Aug. 1 (Bloomberg) -- The U.S. unemployment rate rose to the highest level in more than four years as employers cut jobs again in July, increasing the threat of a deeper economic slowdown.

Payrolls fell by 51,000, less than forecast, after a decline of 51,000 in June, the Labor Department said today in Washington. The jobless rate rose to 5.7 percent, from 5.5 percent the prior month. As recently as April, the jobless rate was 5 percent.

``This is further evidence the economy is in a recession, probably a shallow recession,'' said Nariman Behravesh, chief economist at Global Insight Inc. in Lexington, Massachusetts. ``It will be a major drag on consumer spending.''

The last time the unemployment rate climbed so much in three months was at the end of the last U.S. recession in 2001. Job losses have combined with decreasing property values, stricter lending rules and near-record energy prices to send consumer confidence levels close to the weakest in 16 years in July.

Cutbacks at UAL Corp. and Starbucks Corp. signal firings are spreading beyond builders and manufacturers as raw-materials costs soar. General Motors Corp., which today announced a second- quarter loss of $15.5 billion, may eliminate about 5,000 U.S. jobs by year-end, people familiar with the plan said this week.

Today's report reinforces the case for the Federal Reserve to hold off on any interest-rate increase until next year, economists said.

`Hands Are Tied'

The Fed's ``hands are tied, there is nothing they can do with regard to this,'' said Kathleen Stephansen, director of global economics at Credit Suisse Holdings USA Inc. in New York in an interview with Bloomberg Radio.

Treasuries were little changed and stocks dropped. Yields on benchmark 10-year notes were at 3.96 percent at 9:52 a.m. in New York, from 3.95 percent late yesterday. The Standard & Poor's 500 Stock Index fell 0.5 percent to 1,261.52.

Revisions added 26,000 to payroll figures previously reported for May and June. Economists had projected payrolls would drop by 75,000 after a 62,000 decline the prior month, according to the median of 80 forecasts in a Bloomberg News survey. The jobless rate was forecast to rise to 5.6 percent.

The July cuts bring the total drop in payrolls so far this year to 463,000.

Obama Plan

Democratic presidential candidate Barack Obama plans to announce today an emergency economic plan that would impose a windfall profit tax on oil companies to pay for rebate checks of $1,000 to families and $500 to individuals. He also backs a $50 billion stimulus package, including funds for bridge and road maintenance, intended to save 1 million jobs.

Senator John McCain, the Republican candidate, criticized Obama for advocating higher taxes. ``There is no surer way to force jobs overseas than to raise taxes.''

The National Bureau of Economic Research, the official arbiter of U.S. contractions, tracks payrolls, sales, incomes, production and gross domestic product in making the recession call. The group defines downturns as a ``significant'' decrease in activity over a sustained period of time, and usually takes six to 18 months to make a determination.

The economy shrank at the end of 2007 and grew less than forecast in this year's second quarter, figures from the Commerce Department showed yesterday. Some economists said this indicated the U.S. slipped into a recession late last year. Investors pared bets the Federal Reserve will raise interest rates in 2008.

`Remain Weak'

``The labor market is likely to remain weak, if not deteriorate a bit further,'' Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities in New York, said before the report. ``This should keep the Fed uncomfortably on hold as policymakers are forced to grapple with the coexistence of recessionary and inflationary forces.''

More Americans filed initial claims for unemployment benefits last week than at any time in over five years, Labor reported yesterday. Consumer confidence surveys have indicated that Americans, growing more pessimistic about job prospects, may trim spending.

Starbucks, the world's largest chain of coffee shops, this week said it'll cut another 1,000 jobs as sales slump. The Seattle-based company on July 1 announced plans to eliminate as many as 12,000 positions worldwide.

Factory payrolls fell 35,000 after declining by the same amount in June. Economists had forecast a drop of 40,000. The decrease included a drop of 3,000 jobs in auto manufacturing and parts industries.

Airline Cuts

July announcements at airlines included 7,000 cuts at UAL's United Airlines, and 6,840 at American Airlines parent AMR Corp.

The protracted housing slump and resulting credit crisis were also reflected in today's report. Construction payrolls declined 22,000, the smallest drop since October, after decreasing 49,000. Payrolls at financial firms were unchanged after declining 13,000 the prior month.

Service industries, which include banks, insurance companies, restaurants and retailers, subtracted 5,000 workers, the first decline since March. Retail payrolls decreased by 16,500 after a drop of 6,300.

Government jobs increased by 25,000, the 12th month of gains in public payrolls, after an increase of 43,000.

The average work week shrank to 33.6 hours from 33.7 hours. Average weekly hours worked by production workers were unchanged at 41, and overtime was also unchanged at 3.8 hours. That brought the average weekly earnings up by 22 cents to $606.82 in July.

Workers' average hourly wages rose 6 cents, or 0.3 percent, to $18.06, matching economists' forecasts.

Sealed Air Corp., the maker of Bubble Wrap packaging, said this week it plans to eliminate 900 to 1,000 jobs globally after second-quarter profit fell because of rising costs to make plastics.

``We certainly are facing a challenging environment in 2008,'' Chief Financial Officer David Kelsey said in a July 30 telephone interview.

To contact the reporter on this story: Shobhana Chandra in Washington schandra1@bloomberg.net

Last Updated: August 1, 2008 10:04 EDT