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U.S. jobs market dodges blow from gov't shutdown

* Nonfarm payrolls increase 204,000 in October

* Unemployment rate rises to 7.3 percent from 7.2 percent

* Average workweek holds steady, hourly earnings up

* No discernible payrolls impact from government shutdown

By Lucia Mutikani

WASHINGTON, Nov 8 (Reuters) - U.S. job growth unexpectedly

accelerated in October as employers shrugged off a partial

government shutdown, suggesting the economy was on firm footing

and raising the prospect the Federal Reserve may soon decide to

temper its bond-buying stimulus.

Employers added 204,000 new jobs to their payrolls last

month, and 60,000 more jobs were created in September and August

than previously reported, the Labor Department said on Friday.

The unemployment rate, however, edged up to 7.3 percent from

September's nearly five-year low as federal workers were idled.

Economists expect a reversal in coming months.

The sturdy gain in payrolls beat economists' forecasts for

only 125,000 new jobs and joined data on the factory and

services sectors in suggesting the economy weathered

Washington's budget standoff far better than initially feared.

"This is an important development that increases the chance

that the economy's momentum may have survived nearly intact,"

said Scott Anderson, chief economist at Bank of the West in San


The report gave U.S. stocks a lift even as investors braced

for the possibility of less Fed stimulus. The Standard & Poor's

500 index ended higher for a fifth straight week.

The dollar neared a two-month high against a basket of

currencies, and U.S. Treasury debt prices fell.

Ahead of the jobs data, most economists said the central

bank would wait until its meeting in March to curtail its

bond-buying program. Some now say it would be unwise to rule out

a move as soon as the Fed's next meeting in December.

"This report is significant enough to increase the

probability of a December taper if November's economic data show

a continuation of this trend," said Doug Handler, chief U.S.

economist at IHS Global Insight in Lexington, Massachusetts.

A Reuters poll of big bond dealers conducted after the jobs

figures were released found that more now expect the central

bank to begin dialing back its bond purchases before March,

compared with a similar survey last month.


October's job gains pushed them above the 190,000 monthly

average for the past 12 months, a sign of labor market strength.

The economy, however, may not yet be out of the woods.

A separate report showed an unexpected drop in the Thomson

Reuters/University of Michigan's preliminary consumer sentiment

index for November, which came close to a two-year low.

In a third report, the Commerce Department said inflation,

excluding food and energy, rose 1.2 percent in September from a

year ago, well below the Fed's 2 percent target. Economists said

that could make the central bank less inclined to slow its $85

billion per month bond purchase pace anytime soon.

In addition, the fiscal outlook remains uncertain, with a

deal still to be hammered out on government funding and the

nation's debt limit before current arrangements expire early

next year.

"Until we get past the next fiscal deadline, I would say

it's too early for the Fed to consider anything," said John

Silvia, chief economist at Wells Fargo Securities in Charlotte,

North Carolina.

The employment report also showed a surprisingly large

number of Americans dropped out the labor force, pushing the

participation rate to a 35-1/2-year low of 62.8 percent.

The 0.4 percentage point drop in the participation rate, was

the largest since December 2009.

The department said there had been no "discernible" impact

on its payroll figures from the 16-day government shutdown,

adding that it had received an above-average response rate in

its survey of employers.

The survey of households from which the unemployment rate is

derived, however, was affected.

Furloughed federal workers were considered as employed in

the payroll figures because they received back pay, but as

unemployed in the household survey. That helped fuel an

unusually large decline in the household survey's measure of

employment, and it pushed the jobless rate higher.

Drew Matus, an economist at UBS in New York, said that

without the distortions from the 16-day shutdown, the jobless

rate would have dropped to 7.0 percent in October and the labor

force participation rate would have held close to 63.2 percent.

The better-than expected payrolls count is unlikely to

change expectations of slower economic growth in the fourth

quarter, given that consumer spending slackened and business

inventories rose in the July-September period.

The private sector accounted for all the job gains last

month, with increases across all industries. Government payrolls

fell 8,000.

The leisure and hospitality industry added 53,000 new jobs,

the most since April, while professional and business services

added 44,000 new positions. Payrolls in the retail sector

increased 44,400 last month.

Manufacturing employment rose 19,000, the most since

February. There were also gains in construction, where payrolls

rose 11,000.

The average work week held steady at 34.4 hours. Hourly

earnings gained two cents and have risen 2.2 percent over the

past 12 months.