By Lucia Mutikani
WASHINGTON (Reuters) - U.S. job growth slowed in June and Americans left the labor force in droves, tempering expectations for a September interest rate hike from the Federal Reserve.
Nonfarm payrolls rose 223,000 last month, down from 254,000 in May, with construction and government employment unchanged, and the mining sector purging more jobs, the Labor Department said on Thursday. In addition, 60,000 fewer jobs were created in April and May than previously reported.
The unemployment rate fell two-tenths of a percentage point to 5.3 percent, the lowest since April 2008, but that was a sign of weakness not strength as it reflected about 432,000 people leaving the labor force.
The shrinking work force drove the labor force participation rate, or the share of working-age Americans who are employed or at least looking for a job, down to 62.6 percent, the lowest reading since October 1977. The participation rate had touched a four-month high of 62.9 percent in May.
Economists said the generally weak tone of the employment report, together with the ongoing debt crisis in Greece, made it unlikely the Fed would raise interest rates anytime soon.
"The glass is still half full and not able to quench the thirst of many. The Fed will need to see a strong bounce back in participation to stick to their guns and achieve liftoff in September," said Diane Swonk, chief economist at Mesirow Financial in Chicago.
Before the report, interest rate futures were pricing in a more than 50 percent chance of a December hike, but bets shifted to early 2016. Economists still believe the Fed, which has kept its short-term interest rate near zero since December 2008, will tighten monetary policy this year.
The dollar fell against a basket of currencies, while prices for U.S. Treasury debt rose. U.S. stocks were little changed.
From consumer spending to housing and consumer confidence, economic reports had taken a decisively strong tenor since May, prompting many forecasters to raise their second-quarter growth estimates to above a 3 percent annual pace.
The weak employment report raises the risk that growth will slow in the third quarter. The economy contracted at a 0.2 percent rate in the January-March quarter.
Economists had forecast nonfarm payrolls rising 230,000 last month and the unemployment rate dipping to 5.4 percent. Some cautioned against reading to much into the dour report saying some of the numbers were at odds with the recent bullish data.
Average hourly earnings were unchanged even though manufacturing overtime touched a four-month high in June. The surprise weakness in wage growth could be because the payrolls survey period ended on June 13, which usually tends to exert a downward bias on earnings.
Average hourly earnings increased 2.0 percent in the 12 months through June, decelerating from 2.3 percent in May.
Anecdotal evidence and other measures of wage growth suggest paychecks are getting fatter.
State and local governments have raised the minimum wage and surveys show entry-level wages for new college graduates are rising. In addition, Walmart <WMT.N>, the nation's largest private employer, has announced wage increases twice this year.
Though construction payrolls were unchanged in June, construction spending hit a more than 6-1/2-year-high in May. Residential construction, building permits and new home sales are all at cycle highs.
"With housing showing so much forward momentum, we find it hard to accept that not a single net new person was hired in the construction industry," said Bernard Baumohl, chief global economist at The Economic Outlook Group in Princeton, New Jersey.
There were, however, some encouraging signs in the employment report.
Though the participation rate tumbled last month, other labor market measures that Fed officials are eyeing as they contemplate raising interest rates for the first time since 2006 improved significantly.
A broad measure of joblessness that includes people who want to work but have given up searching and those working part-time because they cannot find full-time employment fell to 10.5 percent, the lowest since July 2008, from 10.8 percent in May.
The number of discouraged workers in June was the lowest since October 2008. In addition, the number of long-term unemployed continued to fall, touching its lowest level since late September 2008. Americans are also experiencing shorter spells of unemployment.
Last month, factory jobs increased 4,000, adding to a 7,000 gain in May. Retail payrolls rose a solid 32,900 and transportation and warehousing created 17,100 more jobs.
The mining sector, however, lost 3,000 more jobs because of layoffs in the energy industry. But the pace of declines is slowing. The sector shed 18,000 jobs in May.
Oil-field companies, including Schlumberger <SLB.N>, Baker Hughes <BHI.N> and Halliburton <HAL.N>, have announced thousands of job cuts after a more than 60 percent plunge in crude oil prices last year.
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(Reporting by Lucia Mutikani; Editing by Chizu Nomiyama and Meredith Mazzilli)