Minnesota's unemployment rate surged to 7.2 percent in July from a revised 6.8 percent in June, largely because of the three-week state government shutdown and seasonal school closings.

Economists and analysts were anticipating the blow from the shutdown, which led to temporary layoffs of thousands of state workers and contractors. But the sting to the jobs market was softened by the addition of 8,200 private-sector jobs, mostly due to gains in manufacturing.

"While the numbers are temporarily distorted by the state government shutdown, Minnesota's job growth continues to improve incrementally and actually shows signs of strength in a number of sectors," said Mark Phillips, commissioner of the Department of Employment and Economic Development.

The net loss of jobs in July was 19,800. Even with the shutdown, the state's unemployment rate remained substantially below the national rate of 9.1 percent.

Most of the 22,000 state workers and 3,000 government contractors who were laid off during the 20-day shutdown have been called back to work. For public sector employment, the good news ends there.

The final state budget agreement at the state Capitol will mean severe budget cuts for government services, agencies and nonprofits. Agency heads say permanent layoffs are likely in the months ahead. In addition, it is unclear how federal budget changes made as a result of the federal debt ceiling solution might affect Minnesota employment long term.

And then there's the lost economic activity. The state shutdown obliterated about $70 million in paychecks during July. That's money that wasn't spent in stores and on bills, a phenomenon that could affect the jobs report for August, said Steve Hine, director of Minnesota's Labor Market Information Office.

Besides the state shutdown, the July report also was complicated by recent changes the federal government has made in its methodology for computing state unemployment rates. Although those changes attempted to "smooth out" or reduce the seasonal "noise" found in unemployment computations, they were far from accurate for the month of July, Hine said.

"I would argue that the 'unofficial' rate of 7.6 percent is more reflective of the shutdown and current economic conditions," he said. "The smoothing has the potential to distort the readings we get from these data on a month-to-month basis."

Manufacturing growth

Factories added 3,500 jobs during the month -- the largest monthly increase on record since 1990. Manufacturing has added about 12,100 jobs since the sector hit bottom in January 2010. That has pushed the sector's job totals above 300,000 for the first time since early 2009. But manufacturing is still about 100,000 jobs shy of the totals seen a decade ago.

Professional and business services added 3,000 jobs in July, mainly thanks to spikes in temporary hiring. Banks, accountants and other financial firms added 1,900 jobs. Government, construction, information and leisure and hospitality lost a combined 38,200 jobs during the month.

Construction lost 2,000 jobs in July. The beleaguered sector gained a revised 4,800 jobs in June, up from the previously reported June loss of 2,200 jobs. Still, June's unemployment rate initially was revised upward to 6.8 percent from 6.7 percent.

Separately, the U.S. Labor Department on Tuesday reported that initial claims for unemployment rose in the week ending Aug. 13 to 408,000, an increase of 9,000 from the previous week's revised figure of 399,000. The four-week moving average was 402,500, a decrease of 3,500 from the previous week's revised average of 406,000.

On the bright side, the growth in Minnesota manufacturing and temp agency jobs gave economists and executives hope that the economy is slowly plodding ahead.

Officials at Enterprise Minnesota, a quasi-governmental agency that counsels factory owners on profitability, said they see renewed hiring in plants across Minnesota.

Companies adding fabrication, welding, IT and other jobs include: Milltronics in Waconia; Central Container in Minneapolis; Grede Foundries Inc. in St. Cloud; Jones Metal Products in Mankato; and SpecSys Inc. in Benson, Montevideo and Granite Falls.

"Up through March, manufacturers were replenishing a lot of their inventory, and that stood in the way of thinking about business long-term. Now, a lot of manufacturers have crossed the threshold to believing that they're past that stage," said Enterprise Minnesota CEO Bob Kill. "Companies are no longer thinking about layoffs, but rather how conservative they should be in hiring."

Other sectors hiring

Financial and accounting firms are similarly adding people, but in a different way, said Jim Kwapick, who overseas the region for employment agency giant Robert Half International.

"Our temp-hire business is growing very nicely, so our results correlate with the [state's] numbers. Uncertainty sometimes causes employers to use temps at all levels versus pulling the trigger on a permanent hire. That said, our permanent [hires] are way up year over year as well," Kwapick said. "Companies are hiring degreed people as temps and then converting them to their employment [rolls] at levels we have not seen for over three years."

Robert Half specializes in accounting, finance, IT, legal and marketing, areas that collectively have about a 4 percent unemployment rate, Kwapick said.

In contrast to the recession, the employment agency now struggles with candidate shortages for several positions including: financial and business system analysts, staff and senior accountants, tax professionals, and web developers and infrastructure experts with Windows 7 experience.

The agency is also seeing a surge in demand for temporary office and administrative workers and for litigation support employees.

Economists noted that the swell of temp workers should drop as the economy gets better. Temp workers today should eventually become permanent employees who get reported under other sectors, Hine said.

Dee DePass • 612-673-7725