By Lucia Mutikani
WASHINGTON (Reuters) - Jobs growth slowed sharply in August, dealing a blow to President Barack Obama as he seeks re-election and setting the stage for the Federal Reserve to pump additional money into the sluggish economy next week.
Nonfarm payrolls increased only 96,000 last month, the Labor Department said on Friday, well below what would normally be needed to put a dent in the jobless rate. Payrolls had grown by 141,000 jobs in July.
While the unemployment rate dropped to 8.1 percent from 8.3 percent, it was only because many Americans gave up the hunt for work. The survey of households from which the jobless rate is derived actually showed a decline in employment for a second straight month.
"The economy is crawling up the down escalator and today's report can only give ammunition to the activist members of the Fed board to loosen monetary policy further next week," said Patrick O'Keefe, head of economic research at J.H. Cohn in Roseland, New Jersey.
The lackluster report piled pressure on Obama ahead of the November vote, with the health of the economy looming large.
While acknowledging the tepid pace of job growth, Obama laid the blame for the labor market's woes on Congress, and Republican lawmakers in particular.
"If Republicans are serious about being concerned about joblessness, we could create a million new jobs right now if Congress would pass the job plans I sent them a year ago," he said at a campaign rally in Portsmouth, New Hampshire.
Republican presidential nominee Mitt Romney said Obama's economic policies had failed.
"There's almost nothing the president's done in the last three and a half, four years that gives the American people confidence he knows what he's doing when it comes to jobs and the economy," Romney told reporters in Sergeant Bluff, Iowa.
The weakness in the jobs market last month was virtually across the board, with average hourly earnings slipping and manufacturing -- the star of the recovery from the 2007-09 recession -- shedding jobs for the first time in nearly a year.
Prospects of more bond purchases by the Fed after its meeting next Wednesday and Thursday lifted U.S. Treasury debt prices and pushed the dollar to a near four-month low against the euro. However, U.S. stocks held steady at four-year highs.
Economists polled by Reuters had expected payrolls to rise 125,000 last month, but some had pushed their forecasts higher after upbeat private sector data on Thursday.
LOOKING FOR A SILVER LINING
Fed Chairman Ben Bernanke last week said the labor market's stagnation was a "grave concern," a comment that raised expectations for a further easing of monetary policy.
The economy has experienced three years of growth since the 2007-09 recession, but the expansion has been grudging and the jobless rate has held above 8 percent for 43 straight months, essentially all of Obama's term and the longest stretch since the Great Depression. Economists say jobs growth in the range of 125,000 a month would normally be needed just to hold the unemployment rate steady.
The jobless rate peaked at 10 percent in October 2009, but progress reducing it stalled this year, threatening Obama's bid for a second term. An online Reuters/Ipsos poll released on Friday showed Obama had gained a slim lead over Romney, 46 percent to 44 percent, but the polling was conducted before the latest jobs figures were released.
The lack of headway putting Americans back to work also has put the question of further monetary stimulus on the table at the Fed.
The Fed has held interest rates close to zero for nearly four years and has pumped about $2.3 trillion into the economy through two bouts of bond buying, or quantitative easing, to drive borrowing costs lower and spur growth.
In addition, it has said it expects to hold rates near zero at least through late-2014, a pledge that is also in play at next week's meeting.
"We expect the Fed to extend its 'low-rates' guidance through mid-2015, and to launch a third round of quantitative easing worth $500-$600 billion," said Nigel Gault, chief U.S. economist at IHS Global Insight in Lexington, Massachusetts.
"We don't think these measures will be very effective in boosting growth, but for the Fed it's a question of trying to do what it can."
A Reuters poll conducted after the data was released found economists see a 60 percent chance of the central bank announcing fresh bond purchases next week, up from 45 percent just two weeks ago.
"STUCK IN THE MUD"
The weak tenor of the jobs report was underscored by revisions to June and July data that showed 41,000 fewer jobs created during those months than previously reported.
In addition, the labor force participation rate, or the percentage of Americans who either have a job or are looking for one, fell to 63.5 percent in August, the lowest in 31 years.
A total of 368,000 people gave up looking for work last month, the household survey showed.
Since the beginning of the year, job growth has averaged 139,000 per month, compared with an average monthly gain of 153,000 in 2011. Last month's tepid gains left the economy 4.7 million jobs short of where it stood when the recession started.
"Today's numbers should check any enthusiasm that the economy was gaining momentum toward the end of the summer. Instead, the economy appears to remain stuck in the mud," said Michael Feroli, an economist at JPMorgan in New York.
Economists say fears of the so-called U.S. fiscal cliff -- the $500 billion or so in expiring tax cuts and government spending reductions set to take hold in 2013 -- and Europe's long-running debt problems have made businesses cautious about hiring in an already sluggish recovery.
Manufacturing payrolls fell 15,000, largely because of declines in automobile assembly jobs. Factory jobs were inflated in July because auto manufacturers kept plants running when they would normally shut them for retooling.
There was little improvement in construction employment, which added 1,000 jobs, even though home builders continued to break ground on new projects at a fast clip. Temporary employment, seen as a harbinger of future permanent hiring, declined for the first time since March.
Retail jobs were one of the few bright spots, rebounding after declining for two straight months.
While payrolls at utilities grew 8,800, that was a snap back from a strike in July.
Government payrolls declined for a sixth straight month, dragged down by state and local governments as they continue to tighten belts to balance their budgets.
The average work week was steady at 34.4 hours in August.
Average hourly earnings fell one cent, which could weigh on consumer spending and hurt overall economic growth. Earnings have risen just 1.7 percent over the past 12 months.
"The recession in Europe, slower growth in Asia, government spending cuts, and uncertainty over the presidential election and future tax and spending policies will be drags through the rest of this year," said Gus Faucher, a senior economist at PNC Financial in Pittsburgh.
(Additional reporting by Jason Lange in Washington, Jeff Mason in New Hampshire and Sam Youngman in Iowa; Editing by Andrea Ricci, Tim Ahmann and Dan Grebler)