July 31 (Bloomberg) -- German unemployment, enjoying its longest decline since reunification in 1990, fell at a slower pace in July as the economy cooled.

The number of people out of work, adjusted for seasonal swings, dropped 20,000 in July to 3.25 million after falling 38,000 in June, the Nuremberg-based Federal Labor Agency said today. That matched the median expectation of 30 forecasts in a Bloomberg News survey of economists. The adjusted unemployment rate held at 7.8 percent, a 16-year low.

Companies in Europe's largest economy are becoming reluctant to hire as the outlook darkens. Business confidence fell the most this month since the Sept. 11 terrorist attacks seven years ago and consumer confidence fell to the lowest since June 2003. Even so, July's drop in the jobless total is the 38th in 40 months.

``It's clear that this isn't going to continue for very much longer,'' said Eckhart Tuchtfeld, an economist at Commerzbank AG in Frankfurt, who expected the jobless total to decline by 20,000. ``Risks for economic growth have clearly increased.''

Today's news followed an unexpected drop in manufacturing orders in May, the sixth straight decline, and the biggest decrease in industrial production in more than 9 years that month.

`Positive'

``The labor market's dynamism has decreased somewhat compared with a year ago,'' said Frank-Juergen Weise, the chief of the Labor Agency, in a Bloomberg Television interview. ``But the development remains positive overall.''

In Europe, the main destination for German exports, factory orders dropped more than twice as much as forecast in May. Growth in the U.S., the biggest buyer of German cars and chemicals outside Europe, will slow in the second half, according to an index of leading economic indicators published July 21.

``The labor market is a trailing indicator,'' said Tuchtfeld. ``It follows hard data such as manufacturing orders and industrial output and indicators like business sentiment with a time lag.''

Signs that the expansion is also cooling may ease concern at the European Central Bank that prices are getting out of control. The ECB increased its main lending rate to a 7-year high of 4.25 percent this month as inflation accelerated to 4 percent, the fastest pace in 16 years.

``Sentiment indicators point to a less favorable performance of the German labor market in the next months as the softer world economy and the ECB rate hike should damp economic growth in the months ahead,'' Stefan Bielmeier, an economist at Deutsche Bank AG, Germany's biggest bank, said in an e-mailed statement. ``The German labor market should pass its peak in summer.''

Still Hiring

While the U.S. probably lost jobs in July for a seventh straight month, companies in Germany are still hiring. Amadeus Fire AG, a temporary-employment agency, recruited more than 600 specialists in the second quarter. Software company PC-Ware AG said July 1 it will add up to 50 people in Germany this year in consulting and sales to the 1,485 it already employs.

``Theoretically it's possible that unadjusted unemployment will drop below 3 million this year,'' Weise said. ``That could happen in September, October, or November. It depends on the weather and if the economy develops as well as expected.''

Seventy-seven percent of Germans expect ``high'' unemployment to remain a problem ``long-term,'' according to a Forsa survey commissioned by Stern magazine. Forsa polled 1,000 people on July 24 and July 25. The margin of error was 3 percentage points.

``We expect dynamism to decrease further in 2009, the reduction in unemployment will be smaller,'' Weise told Bloomberg TV. ``As of today we still expect a decline in unemployment in 2009 compared with 2008.''

The jobless rate in the 15 euro nations held at 7.3 percent in June after the figure for May was revised up from a record low of 7.2 percent, Eurostat, the statistics office of the European Union said today.

According to the latest comparable data from the Organization for Economic Cooperation and Development, Germany's jobless rate was 7.4 percent in May, the same as in France, and compared with 4 percent in Japan and 5.5 percent in the U.S. The OECD average that month was 5.7 percent.

To contact the reporter on this story: Rainer Buergin in Berlin at rbuergin1@bloomberg.net.

Last Updated: July 31, 2008 05:16 EDT