By Nell Henderson
Washington Post Staff Writer
Friday, August 5, 2005 3:12 PM

U.S. job growth jumped last month and the unemployment rate held steady at 5 percent, the government reported today, providing another sign of an economy picking up steam.

Auto dealers, home builders, health care providers and other employers together added 207,000 workers to their payrolls, the biggest monthly increase since April, the Labor Department said. The pace of hiring also was stronger than previously reported in May and June, the department said, adding a combined 42,000 jobs to its earlier estimates.

Meanwhile, home and auto sales are booming, while factory orders are climbing and businesses are investing more enthusiastically in new equipment and software. Inflation is tame outside energy costs, and interest rates remain low.

The economy expanded at a solid 3.4 percent annual rate in the spring, and analysts see the pace quickening this summer.

The labor report provides "yet more evidence that growth is accelerating," said Nigel Gault, U.S. economist at Global Insight, a research firm.

The good news also encouraged more people to start looking for work. The jobless rate was unchanged because the growth in employment was about equal to the increase in job seekers.

Stock prices fell today, however, as many investors concluded that stronger economic growth will prompt the Federal Reserve to raise short-term interest rates higher to keep inflation under control.

Fed policymakers meet Tuesday and are likely to raise their benchmark short-term interest rate another notch to 3.5 percent from 3.25 percent, for a 10th consecutive increase. They probably will continue gradually moving the rate higher for months to come.

Analysts expect the Fed to lift the rate to at least 4 percent this fall before resting. But Fed officials will be unlikely to stop at that point if they believe strong economic growth is still stoking inflation pressures.

Fed policymakers are closely monitoring the recent upward drift in labor compensation, including wages and benefits. They are eager to see the labor market improve but do not want to see it get so tight that it ignites inflation.

Average hourly wages for most workers rose 6 cents in July, or 0.4 percent -- the biggest increase in a year -- to $16.13, the Labor Department said. The figures are for production and non-managerial workers, who account for 80 percent of the labor force.

Average weekly wages rose $2.02 in July, to $543.58, the Labor Department said.

From a business perspective, the combination of rising energy and labor costs increases the pressure to hike prices if possible. Many businesses, however, have been unable to do so because of competition.

From a worker's point of view, higher energy costs during the past year meant that wage gains barely outpaced inflation.

"Incomes rose solidly in July," said Stuart Hoffman, chief economist for PNC Financial Services Group. But, he added, "much of that extra income went into their gas tanks since gasoline prices rose by close to 7 percent [14 cents a gallon] last month."

The July job gains were shared among different racial and ethnic groups. The unemployment rate for whites was unchanged at 4.3 percent in July; the jobless rate among blacks fell to 9.5 percent last month from 10.3 pct in June; the Latino rate slid to 5.5 percent from 5.8 percent.

The biggest job gains were reported by retailers, who added nearly 50,000 workers, or about one fourth of the total. About 10,000 of those hires were made by auto dealerships, which were flooded with customers eager to take advantage of the latest promotions.

Manufacturers, however, trimmed their payrolls by 4,000 workers, including many at automakers that had scaled back production because of bloated inventories.

Meanwhile, the red-hot housing market continued to boost employment. Construction, real estate and lending combined accounted for about 25,000 new hires.

"As far as the Fed is concerned, payrolls growth is probably just about right -- not too hot and not too cold," said Paul Ashworth, senior international economist for Capital Economics Ltd.