U.S. employment fell for a third straight month in August, but the drop was far less than expected and private hiring surprised on the upside, easing pressure on the Federal Reserve to prop up economic growth.

Nonfarm payrolls fell by 54,000, the Labor Department said on Friday as temporary jobs to conduct the decennial census dropped by 114,000.

Private employment, considered a better gauge of labor market health, increased 67,000 after a revised 107,000 gain in July. In addition, the government revised payrolls for June and July to show 123,000 fewer jobs lost than previously reported.

These are very nice numbers for the labor market, said Kathy Lien, a director of currency research at GFT in New York. It means for the time being, some of the fears of weakness in the U.S. economy may be misplaced as the data shows the labor market is not as bad as feared.

U.S. stocks opened higher, while prices for U.S. government bonds fell sharply, and the U.S. dollar rallied against the yen and euro.

Analysts polled by Reuters had forecast overall employment falling 100,000 and private-sector hiring increasing 41,000.

The smaller-than-expected job losses last month lessened fears the economy risked sliding back into recession and eased pressure on the Fed to launch a fresh round of bond buying to keep borrowing costs low.

However, the report was likely to do little to help the Democratic Party in November's crucial mid-term elections.

Obama will talk about the economy in the White House Rose Garden at 10 a.m. (1400 GMT).

Concerns of a double-dip recession had already diminished somewhat this week as data showed strength in manufacturing and gains in consumer spending but the sluggish pace of growth has kept investors on edge.

The unemployment rate edged up to 9.6 percent last month, in line with market expectations, as discouraged workers came back into the labor force to hunt for jobs.


Jobs scarcity has hurt consumer spending, which normally accounts for about two-thirds of U.S. economic activity, and left the recovery from the worst recession in 70 years sputtering.

Growth slowed markedly in the second quarter this year and Fed Chairman Ben Bernanke said last week the central bank stands ready to take fresh measures to support the economy if needed. Minutes of the Fed's last meeting showed several officials felt the outlook would have to deteriorate appreciably to spur fresh monetary support.

The economy is in a bit of a lull and gauging how long we are stuck in this rut will determine if the Federal Reserve needs to step in, said Ryan Sweet, a senior economist at Moody's Economy.com in West Chester, Pennsylvania.

The economy's poor health has weakened President Barack Obama's popularity and could see Republicans wrestle control of Congress away from the Democratic Party in November.

While the jobs data cheered markets, Republicans cited it as a sign that policies pushed by Democrats had failed.

We need a Congress and a White House that will listen to the American people, who are asking 'where are the jobs?,' and help end the uncertainty for small businesses, House Republican leader John Boehner said in a statement.

Typically in midterm elections when there is no presidential race the party in power in the White House suffers losses, but analysts say the drubbing Democrats could face may be unusually severe.

Last month, the dominant service sector added 67,000 jobs after July's 70,000 rise. Temporary help services, which is seen as a harbinger of future permanent hiring, rebounded 16,800 after falling in July for the first time since September.

There were more job losses at cash-strapped state governments, helping to pull down government payrolls by 121,000 compared to a 161,000 fall in July.

Employment in the goods-producing sector was unchanged last month as a drop in manufacturing offset an increase in construction payrolls, which were boosted by the return of 10,000 striking workers. Manufacturing jobs fell 27,000 after gaining 34,000 in July.

The average workweek was unchanged at 34.2 hours the previous month.

(Additional reporting by Nick Olivari in New York: Editing by Tim Ahmann)