The economy may be in for a long period of soft growth after employers hired the fewest number of workers in eight months in May and the unemployment rate rose to 9.1 percent.
Nonfarm payrolls increased 54,000 last month, the Labor Department said on Friday, just over a third of what economists had expected.
However, analysts saw little chance the economy would slide back into recession, given that temporary factors like high gasoline prices and supply chain disruptions from the earthquake in Japan were constraining growth.
The recovery has not been aborted. The economy is not falling into a double-dip, said Sung Won Sohn, an economics professor at California State University in the Channel Islands. This weakness, however, is a warning shot across the bow of the economy.
The broadly weak report confirmed a loss of economic momentum already flagged by other data from consumer spending to manufacturing. The department said it found no clear impact on the jobs figures from the tornadoes and flooding in the Midwest and South.
The sharp slowdown in job creation accompanied signs of softening growth overseas and was troubling news for President Barack Obama, whose chances of re-election next year could hinge on the health of the economy.
In remarks to auto workers in Ohio, Obama did not directly address the jobs figures, although he acknowledged the economy's woes and said it would take a while to mend.
There are still some headwinds that are coming at us. Lately it's been high gas prices, then you have the economic disruptions following the tragedy in Japan, Obama said.
There are always going to be bumps on the road to recovery. We are going to pass though some rough terrain.
PRONOUNCED PAYCHECK CYCLE
High gasoline costs hurt consumer spending in the first quarter, when economic growth was held to a 1.8 percent annual pace after expanding at a 3.1 percent rate at the end of 2010.
Wal-Mart Chief Executive Mike Duke on Friday said the paycheck cycle, where people stock up around payday and then spend less as the month progresses and cash runs out, is more pronounced than it has ever been.
The employment data lent more fuel to talk about the need for the Federal Reserve to extend its asset purchasing program when it expires this month, but officials at the central bank have set a high bar for any further easing of monetary policy.
With the Obama administration and lawmakers discussing how best to trim U.S. spending as they try strike a deal on raising the debt limit, the economy could be left to its own devices.
Ratings agency Moody's on Thursday said it would consider cutting the nation's credit rating if progress is not made by mid-July in talks to raise the $14.3 trillion debt ceiling.
One look at the jobs report should show the White House it's time to get serious about cutting spending and healing our ailing economy, said U.S. House of Representatives Speaker John Boehner.
FED SEEN ON HOLD
U.S. stocks fell to mark a fifth straight week of losses, while the dollar sank to a record low against the Swiss franc.
Treasury debt prices and interest rate futures rose, signaling that traders believe mounting signs of economic weakness will lead the U.S. central bank to keep interest rates pressed to zero for a prolonged stretch.
A Reuters survey on Friday predicted the Fed would leave interest rates on hold this year and most economists did not see an increase before the second half of 2012.
It pushes back expectations to when the Fed can start to renormalize policy, probably well into 2012 before we see an increase in the fed funds rate, said Robert Dye, senior economist at PNC Financial Services in Pittsburgh.
Views the economy was not falling off the cliff were supported by a separate report showing growth in the country's services sector picked up in May.
The Institute for Supply Management's services sector index rose to 54.6 last month from 52.8 in April, with gains in employment and new orders.
The private sector, which has shouldered the burden of job creation, added just 83,000 jobs in May, the fewest since last June, while government payrolls fell for a seventh straight month.
About 39,000 fewer jobs were created in March and April than previously estimated. Payrolls in May had been expected to rise 150,000, with private employment gaining 175,000.
The economy has regained only a fraction of the more than 8 million jobs lost during the recession. Economists say payrolls growth above 300,000 a month is needed to make significant progress in shrinking the pool of 13.9 million unemployed Americans.
The rise in the unemployment rate from 9.0 percent in April reflected discouraged workers re-entering the labor market after a pick-up in hiring in April.
There was very little in the report that suggested the household sector has any reason to become more confident in the recovery and that in itself does not augur well for a future acceleration, said Patrick O'Keefe, head of economic research at J.H. Cohn in Roseland, New Jersey.
Employment in the private services sector rose by a modest 80,000, a sharp slowdown from April's 213,000 increase. Payrolls in May were held back by declines in leisure and hospitality, and retail.
Factory employment contracted for the first time since October, while construction rose for a fourth straight month.
The report showed the average workweek steady at 34.4 hours, and few signs of wage inflation with average hourly earnings rising 6 cents.