By Shobhana Chandra – Jul 8, 2011 7:28 AM PT

American employers added jobs at the slowest pace in nine months in June and the unemployment rate unexpectedly climbed to 9.2 percent, sending global stocks tumbling on concern the world’s biggest economy is faltering.

Employers increased payrolls by 18,000 workers, less than the most pessimistic forecast in a Bloomberg News survey of economists, which called for growth of 105,000. The increase followed a 25,000 gain that was less than half the initial estimate. Hiring by companies was the weakest since May 2010.

“Poor job growth essentially stops any growth in consumer spending,” said Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia. “This is saying that economic conditions are stagnant, with no bright spots.”

Treasuries climbed as the report called into question Federal Reserve forecasts for an economic rebound in the second half of the year and raised the odds of additional stimulus. The increase in unemployment also poses a fresh challenge for President Barack Obama as he seeks to keep the economy growing while also negotiating budget cuts with congressional leaders.

“Stunned,” was how Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York, described his reaction. “This number will really turn your hair gray, that’s for sure. The economy remains mired in its soft patch, which is looking more like a deep bog.”

Estimates of the 85 economists surveyed by Bloomberg for overall payrolls ranged from increases of 40,000 to 175,000. (See related commentary.)

Stocks Slump

The Standard & Poor’s 500 Index slumped 1.2 percent to 1,336.4 at 10:27 a.m. in New York. The yield on the benchmark 10-year note dropped to 3.03 percent from 3.14 percent late yesterday.

The unemployment rate, which rose in June to the highest level this year, was forecast to hold at 9.1 percent, according to the survey median. Estimates ranged from 8.9 percent to 9.2 percent.

Fed officials have said the slowdown in economic growth in the first and second quarters partly reflected temporary factors. Manufacturers were hurt by supply disruptions in the aftermath of the earthquake in Japan, while a surge in gasoline expenses limited spending on non-essential items by American consumers.

“This increases the probability of another round of quantitative easing,” said Jason Schenker, president of Prestige Economics LLC in Austin, Texas, referring to large- scale asset purchases. “If additional stimulus is required, the Fed may be weighing its options.”

Companies reducing staff include Lockheed Martin Corp., the world’s largest defense contractor. Bethesda, Maryland-based Lockheed on June 30 said it plans to cut about 1,500 employees. McLean, Virginia-based Gannett Co., the publisher of 82 newspapers including USA Today, also announced last month it is eliminating about 700 jobs.

Some companies are more optimistic.

‘Improving Slowly’

“The labor market is improving slowly,” Jenny Lin, senior U.S. economist at Ford Motor Co., said on a teleconference with analysts on July 1. “The economy is facing two temporary factors, which slowed growth — the fuel price run-up and Japan impact. Both of these are reversing now and set the stage for some improved readings in the months ahead.”

Billionaire Warren Buffett said he is wagering on continued economic expansion and doesn’t expect a second recession.

“I would bet very heavily against that,” Buffett, chairman and chief executive officer of Berkshire Hathaway Inc., told Bloomberg Television’s Betty Liu on the “In the Loop” program today after today’s data. “How fast the recovery will come, I don’t know. I see nothing that indicates any kind of a double dip.”

Participation Rate

The jobless rate rose even as the participation rate declined to 64.1 percent, the lowest since March 1984. The Labor Department’s survey of households, used to calculate the unemployment rate, showed a 445,000 decrease in employment and a 173,000 increase in unemployment.

In that survey, the government calls 60,000 households and asks people if they are working or looking for a job. The survey includes the self-employed, farm workers and domestic workers. Those people are not counted in the establishment survey used to calculate the payroll figures.

Private hiring, which excludes government agencies, rose 57,000 last month after a 73,000 gain. It was projected to rise by 132,000, the survey showed.

Factory payrolls climbed 6,000 in June after a 2,000 decline in the previous month.

Employment at service-providers increased 14,000 in June, the least since a decline in September. Construction employment fell 9,000 workers, while retailers added 5,200 workers.

Boyd Martin Construction LLC, a commercial construction company in Las Vegas, has cut its employment in half to 20 employees from 40 in 2006 as demand for all types of work has waned.

Chunk of Economy

“When housing went away it took away a chunk of the entire economy and that has affected the entire construction sector,” said owner Boyd Martin, 48.

Government payrolls declined by 39,000 in June, the eighth straight decrease. Employment at state and local governments fell 25,000.

Average hourly earnings dropped 1 cent to $22.99, today’s report showed. The average work week for all workers decreased to 34.3 hours, from 34.4 hours the prior month.

The so-called underemployment rate — which includes part- time workers who’d prefer a full-time position and people who want work but have given up looking — increased to 16.2 percent from 15.8 percent.

The number of temporary workers decreased 12,000. Payrolls at temporary-help agencies often slow as companies seeing a steady increase in demand take on permanent staff.

Recent Figures

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