US job growth is lacking, which could be a warning sign for the Federal Reserve

U.S. hiring fell short of forecasts in August after the July payrolls figure was revised down, a development likely to fuel the ongoing debate over how much the Federal Reserve should cut interest rates.

Nonfarm payrolls rose by 142,000 people following downward revisions from the previous two months, data from the Bureau of Labor Statistics showed on Friday (Sept. 6). The unemployment rate fell to 4.2%, the first drop in five months, reflecting a reversal of temporary layoffs. Average hourly earnings rose 0.4%.

Treasury yields fell on prospects that Federal Reserve officials could cut interest rates by half a percentage point at their next meeting to guard against sustained weakness in hiring. S&P 500 futures remained lower and the dollar extended losses.

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Other reports suggest the labor market is losing steam. While layoffs remain largely subdued, many companies are postponing expansion plans amid high borrowing costs and uncertainty ahead of the November presidential election.

A Federal Reserve survey of regional businesses released Wednesday indicated that employers have become more selective in hiring in recent weeks, with some cutting hours and leaving vacant positions unfilled.

Payrolls gains were led by hiring in the health care and social assistance sectors. Construction and government also posted gains. The diffusion index, which measures the breadth of job growth, rose.

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The participation rate — the share of the population working or looking for work — remained unchanged at 62.7% in August. The rate for workers ages 25 to 54, also known as prime-age workers, declined slightly for the first time since March.