The U.S. labor market weakened last month, with payrolls rising by just 142,000 in August, well below the 161,000 that analysts had expected.
Stock market futures fell sharply before the open on Friday after the Labor Department also cut its forecast for July payrolls, now showing an 89,000 increase compared to an earlier estimate of 114,000.
At the same time, the unemployment rate fell to 4.2%.
In this scenario, the Fed could seek to stimulate the economy with a larger-than-usual interest rate cut of half a percentage point when it meets later this month.
The report on the weak hiring will bolster former President Donald Trump's argument that the Biden-Harris administration has overseen a worsening economy.
A cut in the Fed's benchmark interest rate would ultimately lead to lower borrowing costs for a variety of consumer and business loans, including mortgages, auto loans and credit cards.
Recent economic data has been mixed, raising the importance of the jobs report, one of the more comprehensive economic indicators released by the government.
The Labor Department compiles employment data each month by surveying about 119,000 businesses and government agencies and 60,000 households.
On the downside, companies are advertising fewer jobs and fewer workers are quitting to find new ones. In a healthy job market, workers are more likely to quit for new, higher-paying jobs.
Fewer retirees mean fewer jobs for the unemployed.
The Fed's Beige Book, a compilation of anecdotes from 12 regional Fed banks, reported that many employers appeared to be more cautious about who they were hiring in July and August.
And a Conference Board survey in August found that an increasing percentage of Americans say it's difficult to find work, a trend that correlates with rising unemployment rates.
At the same time, consumer spending, the main driver of U.S. economic growth, grew at a healthy pace in July.
And in the April-June quarter, the economy grew at a solid 3 percent annual rate.
Fed Chairman Jerome Powell has made it clear that he does not want to see the job market weaken any further.
Federal Reserve Board member Christopher Waller is scheduled to speak at the University of Notre Dame later Friday to discuss the economic outlook.
Waller, a ranking member of the board, may offer insight into the Fed's next move.
Some labor market experts say a big Fed rate cut could encourage some companies to hire more quickly.
“Everybody's in a bit of a bind,” said Becky Frankiewicz, North American president of staffing giant Manpower.
“Everybody's looking to the mid-September meeting where they'll be freeing up the budget and starting to spend.”
With post wire
