WASHINGTON -- The Bush administration, in response to the Labor Department's report on Friday that the unemployment rate hit 7.0% in June, said it is worried but insisted the U.S. economy recovery is still under way.

"We are very much concerned about the employment rate, but we would like to see people have an understanding that this turnaround is coming," said Michael Boskin, chairman of the President's Council of Economic Advisers. "We believe the recovery has begun."

Still, Mr. Boskin suggested the Federal Reserve may have to increase the money supply to keep the recovery on track. "Inflation's on a downward path," he said. "So if we start seeing some rebound in the money supply figures, that would be good news. If in the future the money supply numbers don't hold up, the Fed's going to have to deal with that."

Growth in the money supply has been in the middle of the Fed's target ranges, which call for growth of 2.5% to 6.5% in the broad M2 measure of supply this year. However, some analysts say money growth has slowed down lately, and Fed officials have said before that they consider the money supply an important factor in setting monetary policy.

"Boskin's statement is obviously political, but the Fed is not going to ease," said William Sullivan, director of money market research for Dean Witter Reynolds Inc. "Right now an easing of policy would be greeted negatively in the bond market, and the Fed could jeopardize the recovery if it enters into policies that effectively push up intermediate and long-term rates."

Late Friday afternoon, the Fed announced that all three measures of money supply fell sharply in the latest reporting period, underscoring Mr. Boskin's comments that money supply was sluggish.

However, the Fed also released minutes of the Federal Open Market Committee meeting of May 14, in which members agreed not to alter short-term interest rates, saying there was evidence that the economy is recovering. Members also said they did not want to go further in lowering rates in order to avoid adding inflation.

Mr. Boskin's remarks came in a meeting with White House reporters after the Labor Department reported that the unemployment rate in June edged up from 6.9% to 7.0%, the highest level since October 1986. The report also said non-farm payroll jobs fell last month by 59,000 as manufacturing firms and construction firms renewed cutbacks.

The report triggered a selloff in the bond market, which focused instead on other information that suggested the economy is continuing to recover. Private analysts said they were impressed by a revised increase of 119,000 in May non-farm payroll jobs, up from the originally reported increase of 59,000.

The index of aggregate weekly hours in the private sector, which tracks the number of people working as well as overtime, shot up 0.5 in June. The increase reflected a sharp rise in the manufacturing workweek, reinforcing the purchasing managers' report of last week that said U.S. factories were out of recession.

Analysts also were impressed by a 0.6% increase in average hourly earnings to a seasonally adjusted $10.38. The increase followed gains to 0.4% in April and May and is expected to translate into higher personal income, which could also mean higher spending by consumers.

At the same time, the Labor report showed that while some of the big industrial states were clearly recovering, others were getting worse. Michigan, Pennsylvania, and Texas all recorded sharply lower jobless rates. But joblessness in California climbed to 8.2% from 7.7%, and unemployment in Illinois jumped to 7.3% from 6.0%. In York, the unemployment rate reached 7.7% from 7.4%.

"It's a mixed report," said Donald Straszheim, chief economist for Merrill Lynch, Capital Markets. "We all kind of rushed to the conclusion that the recession was over in the last six weeks, and now people are rethinking that conclusion. I don't think they should. There's a lot of good news out there besides this week employment report."

Increases in automobile sales, housing starts, existing home sales, and industrial production all point toward recovery, Mr. Straszheim said. "We're in a transition. It's expected that the numbers will be mixed, and that's what we're getting."

Moreover, economists say the unemployment figures are a lagging economic indicator because companies take time to step up hiring and because signs of better times bring more job hunters into the labor market. In the case of the June report, the ranks of the job seekers were swelled by the latest college graduates. A separate report released by Labor on Friday showed the number of initial claims for unemployment insurance -- a more current measure of labor market activity -- fell again in the latest reporting week.

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