The nation's unemployment rate ticked down to 4.2 percent last month but employers added only 124,000 payroll jobs and hourly earnings rose only slightly, the Labor Department reported yesterday.

The payroll and hourly earnings figures were much weaker than investors had expected and the news left them suddenly doubting that the Federal Reserve will raise short-term interest rates again next month. As a result, both the stock and bond markets soared, reversing large declines triggered only a day earlier by a report that productivity gains slowed sharply in the April-June period. That news had raised fears the Fed would boost rates to make sure inflation remains tame.

The Dow Jones industrial average rose 235.24 points yesterday to close at 11,078.45, an increase of 2.17 percent. The Standard & Poor's 500-stock index rose 2.89 percent yesterday and the Nasdaq composite index did even better with a 3.98 percent gain.

Yields on 30-year U.S. Treasury bonds at yesterday's close fell to 6.01 percent, from 6.13 percent. The price of a bond, which goes up when the yield falls, rose $15.31 for each $1,000 face value.

The key to the relatively small increase in payrolls was a 63,000 drop in the number of manufacturing jobs, which more than reversed an unexpectedly large 51,000 gain in July. That earlier increase, which may have been due to seasonal adjustment difficulties related to an unusual pattern of temporary summer shutdowns of some factories, also had sparked concerns that the economy continued to grow at a pace that eventually could add to inflationary pressures.

"These data counterbalance strength in other economy series," said Ray Stone of Stone & McCarthy, a financial markets research firm. "Should the data in the weeks ahead be stronger than what seems to be on track, the Fed could still tighten at the Oct. 5 [policymaking] meeting. But with the data currently in hand, the odds have shifted toward the Fed taking a wait-and-see attitude."

For the past six months, the unemployment rate has been either 4.2 percent, as it was last month, or 4.3 percent, as it was in June and July. There were 5.9 million people who actively looked for work last month but didn't find it.

The jobless rate for whites was unchanged at 3.7 percent. The often volatile rate for blacks, which had jumped 1.5 percentage points in July to 8.8 percent, dropped back to 7.8 percent, somewhat above its record low of 7.3 percent in June.

Joblessness among persons of Hispanic origin rose to 6.5 percent from 6.2 percent in July, which also was close to the record low for that category of workers.

Another reason that the July report on the nation's labor markets had raised concerns about inflation was that average hourly earnings of privately employed production and non-supervisory workers were estimated to have gone up 0.5 percent that month, capping a string of relatively large monthly increases. But last month, the department said yesterday, average hourly earnings increased only 0.2 percent--to $13.30--and the July figure was revised downward to show a 0.3 percent gain.

That left average hourly earnings only 3.5 percent higher than they were in August 1998. That year-over-year figure was the same as in April and May, but otherwise was the lowest since October 1996. Those increases were well below the 4.4 percent increase from April 1997 to April 1998.

In other words, since April of last year, the rate of increase in average hourly earnings has declined significantly at the same time the U.S. unemployment rate has been falling.

That indicates the nation's tight labor markets are adding little if any to the subdued inflationary pressures in the economy, analysts said.

"August's moderate job growth should ease fears that the economy is overheating," said David Heuther, an economist at the National Association of Manufacturers.

"The net increase of 124,000 [payroll] jobs was the result of moderate job losses in goods-producing industries that were counteracted by larger increases in the service sector," he said.

Industries providing various services increased their payrolls by 132,000 while the number of government jobs rose 47,000.

In addition to the declines in manufacturing, construction payrolls dropped by 29,000 and the number of retail trade jobs, which went up nearly 100,000 in July, dipped by 3,000 last month.

Some other details of yesterday's report also suggested that the demand for additional workers may not be quite as strong as it was earlier in the year.

For example, the index of total weekly hours worked by production and non-supervisory employees rose just 0.1 percent while the index for manufacturing alone fell 0.7 percent. The latter is a signal that industrial production declined as well last month, analysts said.

Separately, an index showing the share of 356 industries increasing their payroll employment indicated that virtually as many were cutting payrolls as were increasing them. That hasn't been true for any month since January 1996, when a blizzard in the eastern part of the country caused many factories to close or reduce hiring.

Meanwhile, the Washington area's unemployment rate dipped to 2.7 percent in July, down from 2.9 percent the month before, with both the District and the suburbs reporting lower joblessness. The July figures are the latest available for the region.

The District unemployment rate was the lowest for the month of July in 11 years, dropping to 6.6 percent from 6.9 percent in June, not adjusted for seasonal employment shifts.

There are 11,100 more city residents with jobs and 8,000 fewer unemployed than a year ago, the D.C. Department of Employment Services said.

Job growth in the Washington metro area has slowed since the spring as employers struggle to find workers.

Over the year ended in July, the region's employers added 69,900 jobs, an annual increase of 2.7 percent, down from the 3 percent level in the first four months of the year.

CAPTION: Joblessness Declines (This graphic was not available)