WASHINGTON - U.S. employers created a solid 169,000 jobs last month and the unemployment rate fell unexpectedly to its lowest level since August 2001, reminders of the economy's vigor before Hurricane Katrina.
While August's jobs tally fell slightly short of the 190,000 gain expected by Wall Street, nonfarm job growth in June and July was stronger than previously thought, the Labor Department said on Friday, raising the count for those two months by a combined 44,000.
"You've got decent payroll growth, which tells you the economy had some nice upside momentum going into Katrina," said Steve Ricchiuto, chief U.S. economist at ABN AMRO in New York. "But it doesn't tell what the economy has done after Katrina and that's really the problem for the marketplace right now."
Financial markets at first seized on the softer-than-forecast August job count, sending prices for U.S. government bonds up and the dollar down. But some of that action quickly reversed as traders digested the data and looked beyond it to the post-Katrina economic realities.
Most analysts believe the storm, which killed an untold number of people and left tens of thousands homeless, will prove only a temporary blow to the $12 trillion U.S. economy.
Still, the storm set off a vigorous debate among economists over whether the Federal Reserve will halt its more than year-long series of interest-rate hikes to let the clouds the storm left over the economy clear.
Estimates of insured losses from the storm range from as low as $9 billion to as high as $30 billion, which would make it the costliest storm to hit the United States and approach the losses stemming from the September 11, 2001, attacks.
Merrill Lynch estimates total loses -- insured and uninsured -- as high as $40 billion.
But a rebuilding boom is expected to offset, with some lag, the hit to economic output brought about by the devastating storm. The biggest question for the U.S. economy going forward has been how quickly the nation's gasoline production capacity, which was dealt a serious blow, is brought back on line.
"It's our understanding that about half of that capacity will be back up and running in one or two weeks, and the other half may take as long as a month or longer," Allan Hubbard, director of the White House National Economic Council, told CNBC television.
"There is going to be a short-term disruption, but it will be short-term," he said.
"THE WORLD HAS CHANGED"
The August jobs data were not impacted by the hurricane, which crossed Florida and slammed into the Gulf Coast after the government had surveyed employers. But economists expect the storm to weigh heavily on the government's next tally.
"Hurricane Katrina's effect on the September payroll job count could be massive," economists at CSFB wrote.
The decline in the unemployment rate in August to 4.9 percent, its lowest level since before the September 11 attacks, came as a separate survey of households also found job creation robust. Analysts had expected the jobless rate to hold steady at 5.0 percent.
The decline in the jobless rate, which has fallen one-half percentage point since February, and the solid payroll gain offered a reminder that labor-market conditions had been improving before Katrina struck.
The tightening job market has been a key factor in the thinking of policy-makers at the Fed, who began pushing short-term interest rates higher in June 2004 in an effort to keep inflation tame. Ten straight quarter-percentage-point hikes have taken overnight rates up to 3.5 percent.
Prior to Katrina, the Fed was expected to bump rates up by another half point by year's end, but the storm surge that breached levees in low-lying New Orleans and battered other coastal towns has brought a sea change in expectations.
Futures markets show investors expect only one more rate hike this year, if any at all.
"This is a view of the economy as we knew it, the world has changed a bit," said James Glassman, senior economist at JPMorgan Chase & Co. in New York, referring to the jobs report. "It's highly likely that the Fed will pause for a while."
Job gains in August were broad-based, although factory employment slipped by 14,000 -- the third consecutive monthly decline. Over the past year, the manufacturing sector has shed 110,000 workers.
The report showed construction payrolls grew by 25,000 -- a figure sure to swell in the months ahead as rebuilding after Katrina gets under way. The service-side of the economy created 156,000 jobs, spread across most sectors.
Average hourly earnings increased two cents, or 0.1 percent, with the year-on-year reading edging down to a 2.7 percent gain. Some economists said that suggested the Fed had little to fear from wage-related price pressures.
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