WASHINGTON -- The bond market finally got solid evidence on Friday that the economy is cooling as the government reported that the pace of job creation slowed considerably in August.

"The main story for the economy is that it's slowing down to a sustainable pace," said Bruce Steinberg, head of macroeconomic analysis for Merrill Lynch & Co.

For the first time this year, some market participants are encouraged that the Federal Reserve's moves to tighten credit are starting to throttle back the economy down toward the 2.5% rate of growth that analysts say can be sustained over the long haul without reviving inflation.

The optimism was fueled by the Labor Department's report on Friday that nonfarm payroll jobs grew a modest 179,000 in August, well below market expectations. The increase followed gains of 383,000 in June and 251,000 in July that rattled the bond market and led to the Fed's move on Aug. 16 to raise short-term rates.

Meanwhile, the civilian unemployment rate stayed unchanged at 6.1%, the government said.

As a result, some economists are now betting that U.S. gross domestic product will be up 2% or possibly less in the third quarter following the first six months of the year, when GDP growth averaged 3.5%.

"Market participants have been looking for the kind of deceleration in job growth that we saw in August," said Thomas Carpenter, chief economist for ASB Capital Management Inc. "This downtrend is significant and may have come earlier than the bond market anticipated."

Normally, Fed officials expect the economy to take up to a year or longer to respond to higher interest rates. But it may be that the impact is coming sooner, half a year since the central bank began tightening credit, Carpenter said.

Virtually no one expects members of the Federal Open Market Committee to tighten rates again when they meet Sept. 27, so the question is what will happen at the Nov. 17 meeting. If GDP growth for the third quarter, which will be a matter of record by then, is weak, officials may hold off from raising rates, Steinberg said.

However, economists cautioned that it is unclear what will happen to the pace of growth later in the year. Some expect a rebound as consumers go back to the showrooms to snap up new cars, and there are still predictions that the Fed will slap on the harnesses with another increase in rates in the fall.

Eugene J. Sherman, director of research for M.A. Schapiro & Co., said he is sticking with his forecast that members of the Federal Open Market Committee will raise the federal funds rate to 5.25% from 4.75% when they meet Nov. 17.

"I think we're at the point of capacity constraints," said Sherman, who estimates that GDP will be up over 3% in the third quarter- above the 2.5% pace that Fed officials are believed to be looking for.

Brian S. Wesbury, chief economist for Griffin, Kubik, Stephens & Thompson Inc., also believes the economy is still going strong and generating price pressures.

"When you look at the anecdotal evidence, we're seeing shortages or we're at capacity in autos, Nike shoes, cardboard, aluminum, boxes, large cargo ships, rail car wheels, and newsprint," Wesbury said. "In many areas of the country, we have reached full capacity in labor and capital."

The bond market, after reacting favorably to the employment report, sold off when the Columbia University Center for International Business Cycle Research said its leading index of inflation rose in August to 111.4 from 109.5 in July. It was the 11th straight monthly gain.

Besides the slower pace of job formation in August, the Labor Department's report had other evidence of softening labor markets.

Total private hours worked per week fell to 34.5 from 34.7, and average hourly earnings were up only 0.2% to $11.13. Average weekly earnings, reflecting the drop in hours worked, fell 0.4% to $383.99. Compared with a year earlier, average weekly earnings were up 2.2% -- less than inflation.

At the White House, officials welcomed the August jobs report and said the economy is continuing to do fine. "The U.S. economy continues to enjoy healthy growth in incomes and employment," said Laura Tyson, head of the President's Council of Economic Advisers.

Tyson, who met with reporters along with Labor Secretary Robert Reich, said that in the past year GDP increased 4% and generated 3.1 million new jobs while "inflation has remained subdued."

Tyson said the unemployment rate of 6.1% "is consistent with a high degree of labor and capacity utilization throughout most of the economy" but that "there is no sign of an intensification of inflationary pressures."

The administration's economic forecast anticipates "a gradual moderation in the growth rate," Tyson said. She and Reich declined to discuss monetary policy, other than to say that the administration and the Fed agree on the goal of sustained, noninflationary growth.

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