Aug. 6 (Bloomberg) -- U.S. employers added 32,000 workers to payrolls in July, just an eighth of the number forecast and adding to evidence that a slowdown in economic growth may extend into the third quarter.

Job gains also were revised lower for the preceding two months, to 78,000 for June and 208,000 in May, or 61,000 less than originally stated, the Labor Department said in Washington. The unemployment rate fell to 5.5 percent, the lowest since October 2001, from 5.6 percent as a separate survey of households showed a gain in employment.

``We are stuck in a soft patch and it may not be as transitory as some of us thought,'' Sung Won-Sohn, chief economist at Wells Fargo & Co. in Minneapolis, said before the report.

The weaker-than-expected job gains may not keep the Federal Reserve from raising its target interest rate Tuesday yet may make them more likely to delay future increases, economists said. The weakest jobs report this year also may fuel criticism President George W. Bush faces from Democratic challenger John F. Kerry, who says Bush has not done enough to help the economy. No economist a Bloomberg News survey expected fewer than 170,000 jobs in July.

``I don't think it would change the Fed's call on Tuesday, but it's not hard to put together a scenario where they would not do anything,'' said Cary Leahey, a senior economist at Deutsche Bank Securities in New York, before the report.

The economy slowed last quarter as higher gasoline costs caused consumers to spend less on other goods and services. Central bankers on Tuesday are expected to raise their benchmark interest rate by a quarter percentage point for a second time this year, to 1.5 percent, to prevent inflation from flaring.

Jobs and Politics

Economists predicted payrolls would rise by 240,000 last month, the median of 74 forecasts in a Bloomberg News survey, following a previously reported 112,000 increase in June. They projected the unemployment rate would hold at 5.6 percent. Estimates ranged from 170,000 to 350,000.

Employment in service-producing industries, including retailers, banks and government agencies, rose 14,0000 last month, the fewest since August, after a 76,000 gain in June, according to the Labor Department. Professional and business services and education and health services were the only categories that increased.

Manufacturers gained 10,000 jobs last month, resuming growth after a revised decline of 1,000 in June.

The U.S. now has added 1.2 million jobs this year.

The pace of employment gains and the quality of the jobs added has become a main issue leading to November's election. Kerry, a four-term Massachusetts senator, blames Bush for a net loss of jobs since he took office and says that have been created generally pay less than those lost. Bush says his tax cuts helped revive the economy and created jobs for 11 consecutive months.

Statistical Tie

Bush, 58, and Kerry, 60, are in statistical ties in national opinion polls including those by Marist College, the American Research Group and ABC News/Washington Post. Factory jobs are concentrated in many of the most closely contested states, including Ohio and Pennsylvania.

A separate Labor Department survey of households, which the government uses to compile the unemployment rate, showed a jump in hiring. Employment grew by 629,000 jobs in that report, outstripping the 577,000 increase in the number of people in the labor force, thereby causing the unemployment rate to fall.

The manufacturing workweek rose to 40.9 hours from 40.8 in June and overtime rose held at 4.6 hours for a third month. Average weekly hours worked for all employees rose to 33.7 from 33.6 the month before. Economists predicted hours would rise to 33.8 from an originally reported 33.6 in June, according to a Bloomberg News survey.

Wages and Spending

Incomes rose last month. Workers' average hourly pay rose 0.3 percent, or 5 cents, after a 0.1 percent increase in June. Economists had expected a 0.3 percent increase in hourly wages, according to the Bloomberg survey. Average weekly earnings rose to $529.09 in July from $525.84 the month before.

``Given that wages are not rising too quickly and that the stimulus from having lower interest rates and tax cuts are now in the rear-view mirror, we expect consumers to start saving more of their income,'' said Andrew Tilton, an economist at Goldman Sachs in New York.

Spending by U.S. consumers fell 0.7 percent in June, the first decline in nine months, as auto sales declined and income growth slowed, the Commerce Department said Tuesday. Incomes rose 0.2 percent after rising 0.6 percent in May.

Fed Chairman Alan Greenspan said in testimony before Congress on July 20 that the slowdown in consumer spending was due to higher prices and ``should prove short-lived.''

Chain-store sales rose 3.3 percent last month, trailing June as the second-weakest report this year.

Other figures suggest a rebound in July spending. Sales of cars and light trucks rose to a 17.3 million annual rate last month compared with 15.4 in June, industry figures this week showed. Sales were the second strongest this year after May's 17.8 million

The Conference Board's measure of consumer confidence rose to 106.1 last month as participants said it became easier to find jobs and believed employment gains would pick up.

``We are hiring workers, and have been for some time,'' said Douglas Duncan, chief executive at FedEx Corp.'s FedEX Freight division in an interview Monday. ``Freight demand right now is very good. We serve the industrial sector, but we also are a very heavy supplier to the retail sector, and frankly, we see growth and strength across all of those segments of the economy.'' FedEx is the world's largest overnight delivery company.

Federal Reserve policy makers are expected to raise the benchmark interest rate by 25 basis points to 1.5 percent next week, based on the median forecast in Bloomberg survey.

The economy grew at a 3 percent annual rate in the second quarter, the slowest in more than year, as rising energy prices cut into consumer spending, the government said last week. The pace of growth may pick up this quarter and average 4.5 percent this year, the most since 1999, according to the median survey in a separate Bloomberg News survey.

``We have had great productivity increases running at 7 percent, 8 percent the last two years,'' Dieter Zetsche, chief executive of DaimlerChrysler AG's Chrysler division, said in an interview Wednesday. ``You need considerably more volume to offset that before you can hire people. Flat employment is what we expect to happen based on considerable growth for us and ongoing productivity gains.''

``We're consolidating our operations as we're trying to improve our productivity,'' J.T. Battenberg, chief executive of Delphi Corp., said in an interview earlier this week. ``We're not a large hirer right at this time -- in fact we're reducing our head count.''

Among blacks, the unemployment rate rose to 10.9 percent from 10.1 percent in June. The jobless rate for Hispanics increased to 6.8 percent from 6.7 percent and for whites fell to 4.8 percent from 5 percent.

For teenagers, unemployment rose to 17.6 percent last month from 16.8 percent. The jobless rate for both women and men fell to 4.9 percent from 5 percent.

To contact the reporter on this story: Courtney Schlisserman in Washington at cschlisserma@bloomberg.net.

Last Updated: August 6, 2004 08:30 EDT