The U.S. economy shed jobs in September for the first time in five months, the Labor Department said on Friday, showing the U.S. recovery is still struggling to hit its stride.
But there were enough rays of hope in the data -- including a drop in the unemployment rate -- to quell speculation in financial markets that the Federal Reserve might move to cut interest rates prior to its next meeting on Nov. 6.
Payrolls outside the farm sector fell by 43,000, in contrast to the 5,000 gain private economists had predicted.
Even more surprising to analysts, however, was a decline in the unemployment rate to 5.6 percent in September from 5.7 percent in August. Experts had forecast a rise in the rate to 5.9 percent.
"This is the proverbial mixed bag," said Richard Yamarone, economist at Argus Research in New York. "The Fed would need to see weaker data to cut. But any time you have payrolls falling, you're taking much needed wind out of the sails of the economic recovery."
Stock prices closed sharply lower, giving up the initial gains they built on optimism over the lower unemployment rate. The Dow Jones industrials sank 189 points or 2.5 percent and the tech-laden Nasdaq slid 26 points or 2.2 percent.
Following the jobs data, traders who bet on short-term interest rates cut the odds of a Fed easing to around 65 percent from near-certainty it would act by Nov. 6.
MORE PAY, LONGER WEEK FOR WORKERS
September marked the first payroll decline since a 21,000 job loss in April. Offsetting some of the gloomy news in the September figure, however, was a sharp upward revision in August payrolls to a 107,000 gain from a previously reported 39,000 increase.
There were a handful of other mildly positive signals in the employment report.
The average U.S. workweek grew to 34.3 hours in September from 34.1 hours in August. That prompted a 0.4 percent rise in the aggregate weekly hours index, which is often seen as a rough proxy for gross domestic product growth.
U.S. workers pocketed a 0.3 percent raise in their pay for the second month in a row. Average hourly earnings jumped five cents to $14.87 in September from $14.82 in the prior month.
But among the key sectors of the economy, there was widespread caution about hiring.
Factory jobs slumped 35,000, while construction payrolls fell by 1,000.
The economy lost 16,000 retail jobs but that was offset by a 16,000 rise in finance, insurance and real estate payrolls.
Reacting to the employment report, a top economist with the Federal Reserve Bank of Philadelphia said she was encouraged that, when the September and August payrolls numbers are taken together, they show a positive average.
Philadelphia Fed research director Loretta Mester also told Reuters she was pleased to see an increase in hours worked, which some economists think presages hiring.
But she said: "I'd feel more comfortable if we were seeing a trend start where we get a pickup in employment growth. That's what we need to have happen for the recovery to continue."
Private analysts were struggling to make sense of the discrepancy between the payrolls series, which is based on a survey of employers, and the unemployment rate, which is gleaned from a poll of households.
"Typically, you need gains in jobs of 100,000 a month to keep the unemployment rate stable," said Merrill Lynch chief economist Bruce Steinberg.
Instead, he noted that the jobless rate has fallen for two months in a row. Steinberg said the rosier picture painted by the unemployment rate was at odds with data showing a high number of claims for jobless benefits.
He tended to give more weight to the payrolls data.
"It was, on balance, a weak report," Steinberg said. He agreed with other analysts who said the data did not warrant a so-called inter-meeting Fed move -- action taken between the central bank's regular scheduled policy meetings -- but said a reduction in borrowing costs does seem likely next month.
"The Fed is going to ease at the next meeting," he said.
"ON THE EDGE"
Explaining some of the conflicting signals in employment the data, Howard Hayghe, an economist with the Labor Department's Bureau of Labor Statistics, noted that the household survey includes self-employed people while the payroll series does not.
He said that recently, the household survey has been boosted by the number of teenage workers who have held on to their summer jobs, rather than leaving the workforce as many do in the fall.
"The decline in the unemployment rate was good news, but it probably can be discounted, since it's mainly visible in the numbers for teenagers," said Bill Cheney, chief economist at John Hancock Financial Services in Boston.
Even within the household survey, there were reasons for caution. For example, the data said workers were remaining unemployed for an average of 17.8 weeks, the longest since December 1994.
The jobs data followed downbeat reports that have fueled fears that the U.S. economy, which has been in recovery from last year's recession, may fall victim to another downturn.
On Tuesday, the Institute for Supply Management's closely watched survey showed a contraction in the factory sector for the first time in eight months.
At the Fed's Sept. 24 meeting, a majority of officials opted against changing rates. But two policymakers dissented, and pushed for a rate reduction. After the weak ISM data, speculation about a potential inter-meeting Fed rate cut began to gather steam in financial markets.