Employers cut another 263,000 jobs in September and the unemployment rate rose to a 26-year high of 9.8%, raising worries that the persistently weak labor market could undermine a nascent economic recovery from the worst U.S. recession since the Great Depression.
The economy, by most accounts, has begun to grow again. But Friday's Labor Department report underscored the risk that without jobs, consumers won't have income to spend and that will restrain growth and give employers little reason to resume hiring after 21 consecutive months of job losses.
The bleak report comes amid continuing talks between the White House and Congress on extending of some parts of the stimulus package enacted in February, such as unemployment benefits and health-insurance subsidies.
"The pace of the recovery is likely to slow," said Nigel Gault, chief U.S. economist for research firm IHS Global Insight. "Ultimately, if we don't get job growth, we're not going to get sustained growth in consumer spending. How could we get a really strong recovery without consumers?"
Podcast Economist John Canally of LPL Financial discusses the report showing the unemployment rate climbed to 9.8%.
With the economy propped up by government spending on programs such as "cash for clunkers," economists worry the fragile recovery will fizzle if employers don't soon begin hiring. Programs such as extensions of unemployment benefits to the $8,000 tax credit for first-time homebuyers have helped stabilize the housing market and construction spending. Manufacturing output has begun to rebound as companies look to rebuild inventories, while companies have used productivity gains to regain profits.
But hiring hasn't followed.
The number of unemployed -- officially at 15.1 million -- is greater than the population of all but four states. The proportion of people who have been searching for work for longer than half a year rose to 35.6% of the unemployed, from a third of the work force in August. The dismal state of the job market led to a decline of 571,000 in the labor force, a sign that discouraged workers have given up looking for work entirely.
Investors signaled concern that the economy isn't recovering as steadily as many had hoped. The Dow Jones Industrial Average fell 21 points, or 0.2%, to 9487.67.
A separate report Friday showed more disappointing news: Factory orders fell 0.8% in August from a month earlier, after four months of increases.
Write to Conor Dougherty at conor.dougherty@wsj.com
Printed in The Wall Street Journal, page A1
Companies in the United States are shedding more jobs, pushing the country's unemployment rate to a 26-year high of 9.8%.

The US Labor Department said on Friday that employers cut 263,000 jobs in September, with companies in the service industries — including banks, restaurants and retailers — hit especially hard.  This is the 21st consecutive month of job losses in the country.

The United States has now lost 7.2 million jobs since the recession officially began in December 2007. The new data has sparked fears that unemployment could threaten an economic recovery. Top US officials have warned that any recovery would be slow and uneven, and some have predicted the unemployment rate will top 10% before the situation improves.

"Continued household deleveraging and rising unemployment may weigh more on consumption than forecast, and accelerating corporate and commercial property defaults could slow the improvement in financial conditions," read a report by the International Monetary Fund's World Economic Outlook, predicting that unemployment will average 10.1% by next year and not go back down to five percent until 2014.

Mark Zandi, chief economist at Moody’s Economy.com, said that “it’s a very fragile and tentative recovery. Policy makers need to do more.”

"The number came in weaker than expected. We saw a lot of artificial involvement by the government to prop up the markets, and now that that is starting to end, the private sector isn't yet showing signs of life," said Kevin Caron, a market strategist for Stifel, Nicolaus & Co.

Also on Thursday, the US Commerce Department said factory orders fell for the first time in five months, dropping eight-tenths of a percent in August.  Orders for durable goods — items intended to last several years (including everything from appliances to airliners) — fell 2.6%, the largest drop since January of this year. 

The US government has been spending billions of dollars — part of a $787 billion stimulus package — to help spark economic growth.  There have been some signs the economy is improving.

The Commerce Department said on Thursday that spending on home construction jumped in August for its biggest increase in 16 years. A real estate trade group, the National Association of Realtors, said pending sales of previously owned homes rose more than 12 percent in August, compared to August 2008.

A separate Commerce Department report said that consumer spending, which accounts for more than two-thirds of US economic activity, rose at its fastest pace in nearly eight years, jumping 1.3 percent in August.

Other reports have provided cause for concern. A banking industry trade group said Thursday the number of US consumers making late payments, or failing to make payments, on loans and credit cards is on the rise. A survey by a business group, the Institute for Supply Management, Thursday showed US manufacturing grew in September, but at a slower pace than in August when manufacturing increased for the first time in a year and a half.  

Stock markets reacted negatively to the reports. The Dow Jones Industrial Average fell 41 points in early trading, reaching a level of 9467. This follows a drop of 203 points on Thursday, its largest loss in a single day since July. The London FTSE index fell 55 points, or 1.1%, to reach 4993 points by 15.00 local time.