August's nonfarm payrolls growth of just 142,000 raises concerns that the economy is healing unevenly, but economists say the stunningly weak jobs report could be just a temporary setback in a stronger trend.
The soft employment data, however, is also questionable enough to add fuel to the debate about labor slack when the Fed meets later in the month, though economists don't see any change in Fed policy.
The total August payrolls growth is the first below 200,000 in seven months, and included revisions that cut a combined 28,000 jobs from June and July. The jobless rate fell to 6.1 from 6.2 but it accompanied a drop in labor force participation to 62.8 percent from 62.9 percent.
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"I think it's just a clunker. I wouldn't put too much emphasis on it. It is disturbing .We had six months of 200,000 and now we have a clunker," said John Canally, market strategist and economist at LPL Financial. Canally said August payroll data have been below expectations 17 of the last 18 years.
"Retail was down 8,000. Manufacturing was flat. In the prior month, manufacturing had been 28,000 and retail was up 21,000. That swing alone has to be enough to explain it," Canally said. But while a disruption resulting in 17,000 lost food and beverage jobs in New England explains the retail number, economists say the manufacturing number does not stack up with auto sales at near record levels and production running high.
Economists expected steady job growth—225,000 and a slight drop in the unemployment rate to 6.1 percent, according to Thomson Reuters.
The growth number contrasts sharply with a stream of much stronger data, including Thursday's ISM report on nonmanufacturing activity, the fastest pace since 2005. Unemployment claims have also been holding at low levels, with the four-week average 302,750 among the lowest since before the financial crisis.
"I don't believe it. ... You can't predict a weak number, but August tends to be weak consistently, and it tends to get revised up consistently," said Mark Zandi, chief economist at Moody's Analytics. "I think the trend is still north of 200,000. Every other data point is pointing to stronger growth, not weaker growth."
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Stocks were mixed in morning trading, and bond yields were lower as bond prices rose. The 10-year had been as high as 2.47 percent ahead of the jobs report and slumped below 2.40 after the report. It was at 2.42 in midmorning trade. The dollar index, which has been trading higher, slipped.
"I think they're going to dismiss it. I don't think people are going to buy into it," Zandi said. But if, "we get another like this next month or if it shows up in other data ... retailing has been on the surprisingly soft side. If that gets softer, people will believe it."
Traders were watching the jobs report in anticipation of what it could mean for the Fed when it meets Sept. 16 and 17. The improvement in recent economic data has inspired some who see the Fed perhaps moving faster to raise rates next year, after its quantitative easing bond buying program ends this fall.
"Unfortunately the August (nonfarm payrolls) report does not clearly come down on the dove or hawks side as the debate about the absolute level of slack in the economy will remain ongoing. But at least for today, the bond market is taking some chips off the table for the rate-hike-sooner trade," said Adrian Miller, head of fixed income strategy at GMP Securities.
The jobs number comes after a day in which the Fed figured high in Wall Street conjecture. The European Central Bank's surprisingly bold move Thursday to cut its key rates and embark on a securities purchase program spurred a debate as to whether the Fed might move faster to step back from its commitment to keep rates low for a "considerable period."
There was also speculation on the other side, with some saying the Fed could hang on longer to its zero rate policy because of weakness in the global economy.
The Fed is expected to curtail the tapering of its bond buying program at the October meeting. So, the focus now is on what it will say at this month and whether it will drop the language in its statement about the "considerable period" to give itself more flexibility should the economy—or labor market—strengthen considerably.
More hawkish Fed members have been pointing to the improved labor market as a reason to consider returning to a more normal rate enviroment, while Fed Chair Janet Yellen has pointed to labor slack and the issue of the long term unemploymend and underemployed.
The number of long-term unemployed declined in August by 192,000 to 3 million, a group that accounts for 31.2 percent of the unemployed. That group totaled 4.3 million a year ago.
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"It does give Janet Yellen a little bit of a push back against the hawks looking for an earlier rate hike," even if the number appears to be an anomaly, said Diane Swonk, chief economist at Mesirow.
"The shortfall is not a trend. This is a blip, and I think it's really important to understand there was a miss on retail we know was due to a strike, and the manufacturing doesn't go along with what we know is going on," she said.
Swonk said recent trade data also show a stronger economy in the third quarter, growing at a 3 percent pace. "It's not the anecdotes that make the economy, but when the plurality of anecdotes tell you one thing and the official data tells you something else, you have to question the official data," she said. "We should be turning out about 220,000 here and the 142,000 just doesn't add up."
—By CNBC's Patti Domm