By Lucia Mutikani
WASHINGTON (Reuters) - Jobs growth slowed sharply in August, setting the stage for the Federal Reserve to pump additional money into the sluggish economy next week and dealing a blow to President Obama as he seeks reelection in November.
Nonfarm payrolls increased only 96,000 last month, the Labor Department said on Friday. While the unemployment rate dropped to 8.1 percent from 8.3 percent in July, that was because so many Americans gave up the hunt for work.
The survey of households from which the jobless rate is derived showed a drop in employment. The lackluster report keeps the pressure on Obama ahead of the November vote in which the health of the economy looms large.
"This weak employment report, in jobs, wages, hours worked and participation is probably the last piece the Fed needs before launching another round of quantitative easing next week," said Joseph Trevisani, chief market strategist at Worldwide Markets in Woodcliff Lake, New Jersey.
U.S. stock index futures pared their gains on the report, while Treasury debt prices turned positive. The dollar extended its losses versus the euro.
Economists polled by Reuters had expected payrolls to rise 125,000 last month, but some had pushed their forecasts higher after upbeat data on Thursday.
Fed Chairman Ben Bernanke last week said the labor market's stagnation was a "grave concern," a comment that raised expectations for a further easing of monetary policy as soon as the central bank's meeting on Wednesday and Thursday.
The economy has experienced three years of growth since the 2007-09 recession, but the expansion has been grudging and the jobless rate has held above 8 percent for more than three years -- the longest stretch since the Great Depression.
The jobless rate peaked at 10 percent in October 2009, but progress reducing it stalled this year, threatening Obama's bid for a second term. An online Reuters/Ipsos poll on Thursday gave Republican Challenger Mitt Romney a 1-point edge on Obama, 45 percent to 44 percent.
The lack of headway putting Americans back to work has also put the question of further monetary stimulus on the table at the Fed. The central bank has held interest rates close to zero for nearly four years and pumped about $2.3 trillion into the economy through two bouts of bond buying.
AMERICANS GIVE UP SEARCHING FOR WORK
The weak tenor of the employment report was also emphasized by revisions to June and July data to show 41,000 fewer jobs created than previously reported.
In addition, the labor force participation rate, or the percentage of Americans who either have a job or are looking for one, fell to 63.5 percent -- the lowest since September 1981.
A total of 368,000 people gave up looking for work in August, the household survey showed.
Since the beginning of the year, job growth has averaged 139,000 per month, compared with an average monthly gain of 153,000 in 2011.
Economists blame fears of the so-called U.S. fiscal cliff -- the $500 billion or so in expiring tax cuts and government spending reductions set to take hold at the start of next year unless Congress acts -- and Europe's long-running debt problems, for the slowdown in hiring.
Job creation last month was weak across the board, with manufacturing payrolls falling 15,000, the first decline since September last year. Factory jobs were inflated in July because automobile manufacturers kept plants running when they would normally shut them for retooling.
There was little improvement in construction employment, which added 1,000 jobs. Temporary hiring fell 4,900, declining for the first time since March.
Utilities payrolls saw a snap back, adding 8,800 after being depressed by the strike of about 9,000 workers in July.
Government payrolls declined 7,000, falling for a sixth straight month.
Average hourly earnings fell one cent last month, highlighting the underlying weakness in the labor market. Earnings have risen 1.7 percent over the past 12 months.
The average work week was steady at 34.4 hours in August.
(Additional reporting by Nick Olivari in New York; Editing by Andrea Ricci)