Economy added 204,000 jobs in October; unemployment rate ticks up to 7.3 percent

The U.S. job market finally seems to be picking up — but for a shrinking share of the population.

The Labor Department reported Friday that the nation’s economy added 204,000 jobs in October, defying analysts’ expectations of weak results even as the federal government shutdown bumped up the unemployment rate to 7.3 percent. Businesses in retail, hospitality, manufacturing and health care expanded their payrolls significantly. Estimates of hiring for the previous two months were revised upward.

But the number of people in the labor force fell in October as many simply gave up hope of finding a job. The percentage of people in the workforce is now at its lowest level in 35 years.

October’s data underscored broader shifts in the American economy toward increasingly skilled labor. Nearly 11 percent of workers without a high school diploma were unemployed last month, according to government data, compared with just 4 percent of college graduates.

“The job market is actually narrowing,” said John Silvia, chief economist at Wells Fargo. “There’s a smaller group of people working, but they are prospering.”

Judy Chudars, founder and president of CityStaff, a job placement firm, works with hundreds of recent graduates in the Washington region and said there is a healthy demand for those candidates. In fact, one of the biggest challenges that firms face now is snapping up applicants before they are hired somewhere else, she said.

In addition, Chudars said, more people are voluntarily leaving their jobs for lateral positions — a key characteristic of a healthy labor market that economists call “churn.”

“They have options and things are moving quickly,” Chudars said.

But for many of the nation’s 11.3 million unemployed workers, the outlook is very different. About a third have been out of a job for six months or more, while 815,000 were officially classified as so discouraged by their prospects that they had stopped looking. The report showed that 720,000 people left the labor force in October, an unusually large decline.

There have been small signs of progress for those hardest-hit: The average length of unemployment has come down from its peak of nearly 41 weeks in 2011. But analysts worry that many of those workers have lost skills and connections that could help them land a new job.

In an interview, Labor Secretary Thomas Perez called for new spending on infrastructure and immigration reform to boost the economy and create new jobs. But he added that worker training is also needed to ensure that businesses can fill open positions.

“I’m heartened by the numerous conversations I have with employers who say, ‘I want to grow my business,’ ” Perez said. But they often add that “too many people coming through the door don’t have the skills that I need.”

The bifurcated labor market has also complicated policymakers’ efforts to jump-start the recovery. The Federal Reserve has tied its multibillion-dollar economic stimulus program to the health of the labor market. But it has been frustrated by declines in the labor force participation rate and by the muddy outlook for jobs.

Central bank officials have walked back statements suggesting they would begin dialing down the stimulus by the end of the year as higher interest rates, the fiscal crisis and conflicting labor reports have clouded the economic picture. Atlanta Fed President Dennis P. Lockhart said Friday that the data will likely remain murky through December and that he does not expect the recovery to improve until next year — if then.

“There is a nontrivial chance that 2014 will look like 2013,” he said in a speech in Mississippi.

Lockhart cited fiscal retrenchment in Washington as one of the greatest risks to faster economic growth. Analysts expect the government shutdown will shave half a percentage point from the nation’s gross domestic product during the fourth quarter.

Economists had also been bracing for the shutdown to undermine employment in October. Not only were thousands of workers furloughed, but economists also worried that the political brinkmanship that led to the closure would devastate business and consumer confidence and derail hiring.

But the data suggested surprising strength in the private sector. Retailers added 44,000 jobs last month, many of them at bars and restaurants. The hospital sector hired a net 53,000 workers, while the manufacturing industry gained 19,000 jobs.

Speaking in New Orleans, President Obama acknowledged the improvement but lamented the “self-inflicted wounds” from Washington.

“Our businesses are resilient,” he said. “But there is no question that the shutdown harmed our jobs market. “

The national unemployment rate ticked up to 7.3 percent as a result of workers who were furloughed during the federal government shutdown. The White House estimated that more than half a million workers were affected, but a technical quirk caused most of them to be classified as employed in the Labor Department’s survey.

David Nakamura contributed to this report from New Orleans.