Updated from 10:06 a.m. EDT

The pace of job growth slowed to a crawl in July, suggesting the economic softness in June wasn't as "transitory" as

Federal Reserve

Chief Alan Greenspan had hoped.

Nonfarm payrolls grew just 32,000 last month, well below the 243,000 estimate. Job growth was also weaker than expected in May and June, as the government revised payroll growth down by a combined 61,000.

Economists described the report as "a major disappointment," "staggeringly sluggish" and "stunningly disappointing."

Expectations for aggressive interest rate hikes this year fell sharply on the news, although the market still expects the Fed to raise rates by a quarter point next week to 1.50%. Bonds surged, with the yield on the 10-year note plunging to 4.23%. Stocks fell, with the

Dow

down 1% to 9860 and the

Nasdaq

off by 1.5% to 1793.

"The bottom line is the economy has hit a slow patch and the slow patch is much longer than just June," said Richard Yamarone, an economist at Argus Research.

In testimony before Congress last month, Greenspan said the economy's recent softness would prove "short lived," noting that consumer spending had been crimped by high energy prices that are "transitory."

But employment growth has been slowing down since March, when 353,000 new jobs were created. And with oil prices still hitting record highs and tax relief fading, the fate of consumer spending has been thrown into question. Consumer spending, which accounts for two thirds of economic growth, rose just 1% in the second quarter, the slowest pace in three years.

"It's definitely disappointing in that we've now had two straight months of weak payroll growth," said Patrick Fearon, an economist at AG Edwards.

June payrolls was revised down to 78,000 from 112,000 while May's numbers were revised down to 208,000 from 235,000. The data has significant implications for the White House and the re-election of President Bush, who has recently claimed that the U.S. economy has "turned the corner."

Treasury Secretary John Snow and White House Council of Economic Advisors chairman Gregory Makiw said the administration is "not satisfied" with the employment data but stressed that the overall economy is heading in the right direction.

Still, Gene Sperling, senior economic advisor to Democratic presidential nominee John Kerry told CNBC that the report is "bad news" for Americans. "Not only are we not turning the corner on jobs, it's not even clear we're heading in the right direction," he said.

AG Edwards' Fearon noted that much of the weakness in July came from the services industry, and specifically financial services. "This makes you think that it is related, at least in part, to the pullback in mortgage refinancing activity."

Services-producing industries added just 14,000 jobs in July, the lowest since August 2003. Retail lost 19,000 and financial services shed 23,000. The manufacturing sector added 10,000 jobs.

"Businesses are hesitant to invest in spending and hire new workers," said Yamarone, who called for 170,000 jobs to be created. "Terrorism is really making businesses indecisive and I think that's going to hang over the economy for a very long while."

Prior to the jobs report Friday, traders had fully priced in three rate hikes this year and saw a 60% chance of a fourth. Now, the market is pricing in just two rate hikes, with about a 60% chance of a third.

Tony Crescenzi, chief bond strategist at Miller Tabak & Co., and contributor to

TheStreet.com's

sister site

RealMoney

, said corporate America has become cautious because of high energy prices, elevated benefit costs and uncertainty over the election.

"Between now and the election... it's going to be a difficult period," he said.

A separate survey of households showed that the unemployment rate fell to 5.5% from 5.6%. Employment jumped by 629,000 in July, while the labor force expanded by 577,000. Still, the household survey is a much smaller sample, covering about 60,000 residences. In contrast, payrolls are taken from a sample of 400,000 businesses.

"This is a huge discrepancy between these two measures of job gains last month," wrote Stuart Hoffman, chief economist at PNC Financial Services Group. "But I (and the markets) put more weight on the lower payroll jobs data."

Hoffman described the report as a "major disappointment."

BMO Nesbitt Burns economist Sherry Cooper noted that some of the details of the payroll report weren't as bad as the headline number.

The average workweek lengthened by a tenth of an hour to 33.7 hours from the record low 33.6 hours. Total hours worked in the economy increased 0.3% after slipping 0.5% in June. Average hourly earnings rose 0.3%, in line with estimates.

Still, Cooper said payrolls were "staggeringly sluggish."

"July's U.S. nonfarm payroll employment report says, loud and clear, that the soft patch continues," she wrote.

Ashraf Laidi, an analyst at MG Finanical Group, said the "stunningly disappointing" data validate the distrust over Greenspan's overly bullish comments three weeks ago before Congress. Those remarks sent bonds into a tailspin and were the sole catalyst behind a rally in the dollar.

"This is a discouraging situation at this point in the business cycle," said Peter Morici, a business professor at Robert H. Smith of Business at the University of Maryland. "The labor market will continue to remain tough for both the employed and those persons seeking new jobs."