Updated from 8:44 a.m. EDT

The U.S. economy lost fewer jobs than expected in September, but the data didn't fully reflect the effects of both hurricanes that hit the Gulf Coast in recent weeks.

According to the Labor Department, 35,000 jobs came off payrolls last month, and the unemployment rate rose to 5.1% from 4.9%. Before the report, Bloomberg's consensus estimate showed that, on average, economists were predicting that 150,000 jobs were lost last month.

A total of 77,000 jobs were added to revised data for July and August. Average hourly earnings rose 0.2% last month, the employment report indicated.

"After this latest release we can come away with the underlying theme that the U.S. economy was strong before, during, and after the hurricanes," said Michael Gregory, senior economist at Harris Nesbitt. "It provides the economic backdrop with why the Federal Reserve wants to keep inflation in check. The real question now is what pauses first, inflation pressures or the Fed?"

The range of estimates for September was extremely wide owing to the uncertainty created by Hurricane Katrina, with economists figuring that anywhere from 25,000 to as many as 350,000 jobs vanished. The unemployment rate was expected to rise to 5.1%.

Hurricane Rita made landfall during the September data collection period. As a result, response rates for the Labor Department's surveys were lower than normal in some areas. However, because the numbers reflect the jobs situation before Rita came ashore, its impact on measures of employment and unemployment was negligible, the government said.

"We are still seeing lots of jobs being created in the middle market sector, which shows our economy is still very strong," said Bill Olson, president and CEO of MRI Network. "The hurricanes have caused pain in the service sector in the short term, but the long-term outcome of Hurricane Katrina will be job creation."

The jobs report, one of the most influential economic indicators the government releases, arrived at the end of a busy week for data. The Institute for Supply Management's manufacturing index rose unexpectedly for September, while the Census Bureau said factory orders rose 2.5%, beating estimates.

"As far as manufacturing is concerned, we are seeing a surge in job growth in biotech and computer software industries," said Olson.

Meanwhile, the ISM's services index for last month dropped to 53.3 from 65.0 in August, pointing to a slower rate of expansion. Any reading above 50 signals growth, but economists had been looking for 60.0. The report added to Wall Street's inflation worries by showing a jump in its prices-paid component.

Fed officials, led by rather candid remarks from Dallas Fed President Richard Fisher, made comments this week that strongly suggested the central bank hasn't completed its rate-hiking campaign.

The Fed, saying it wants to stave off inflation, has tightened credit 11 times since the overnight bank lending rate was at a four-decade low of 1%. The fed funds rate now stands at 3.75%.

First-time jobless claims rose 21,000 to 390,000 for the week ended Oct. 1. Economists expected new claims to decline to 350,000 from 356,000 the previous week.

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