By Lucia Mutikani

WASHINGTON, (Reuters) – U.S. job growth increased moderately in September, with the unemployment rate dropping to near a 50-year low of 3.5%, assuaging financial market concerns that the slowing economy was on the brink of a recession amid lingering trade tensions.

The Labor Department’s closely watched monthly employment report on Friday, however, showed wage growth stagnating and manufacturing payrolls declining for the first time in six months. The retail sector also continued to shed jobs.

The report came on the heels of a string of weak economic reports, including a plunge in manufacturing activity to more than a 10-year low in September and a sharp slowdown in services industry growth to levels last seen in 2016, that heightened fears the economy was flirting with a recession.

With signs that the Trump administration’s 15-month trade war with China is spilling over to the broader economy, continued labor market strength is a critical buffer against an economic downturn. The trade war has eroded business confidence, sinking investment and manufacturing.

Nonfarm payrolls increased by 136,000 jobs last month, the government said. August data was revised to show 168,000 jobs created instead of the previously reported 130,000 positions.

The initial August job count was probably held back by a seasonal quirk related to students leaving their summer jobs and returning to school. Economists polled by Reuters had forecast payrolls would increase by 145,000 jobs in September.

U.S. stock index futures pared losses after the release of the data and later moved into positive territory. U.S. Treasury yields jumped and the dollar trimmed losses against the yen and euro. (Full Story)

Regardless of the continued moderate employment growth and sharp drop in the jobless rate, economists expect the Federal Reserve to cut interest rates at least one more time this year, given the trade policy uncertainty.

Washington announced this week tariffs on aircraft, other industrial products and agricultural products from the European Union as part of a World Trade Organization penalty award in a long-running aircraft subsidy case. Trade experts expect the EU will impose tariffs on U.S. goods next year over state subsidies for Boeing BA.N.

The U.S. central bank cut rates last month after reducing borrowing costs in July for the first time since 2008, to keep the longest economic expansion in history, now in its 11th year, on track. Growth estimates for the third quarter range from as low as a 1.3% annualized rate to as high as a 1.9% pace. The economy grew at a 2.0% pace in the second quarter, slowing from a 3.1% rate in the January-March period.

STRONG GOVERNMENT HIRING

Steady job growth last month came despite the Institute for Supply Management’s (ISM) measure of manufacturing employment tumbling to more than a 3-1/2-year low. In September, the ISM’s gauge of services industry employment fell to its lowest reading since February 2014.

While September’s job gains were below the monthly average of 161,000 this year, they were still above the roughly 100,000 needed each month to keep up with growth in the working-age population. The two-tenths of a percentage point drop in the unemployment rate from 3.7% in August pushed it to its lowest level since December 1969.

A broader measure of unemployment, which includes people who want to work but have given up searching and those working part-time because they cannot find full-time employment, declined to 6.9%, the lowest level since December 2000, from 7.2% in August.

Despite the tight labor market, average hourly earnings were unchanged last month after advancing 0.4% in August. That lowered the annual increase in wages to 2.9% from 3.2% in August. The average workweek was unchanged at 34.4 hours.

Hiring is slowing across all sectors, with the exception of government, which is being boosted by state and local government recruitment.

Private payrolls increased by 114,000 jobs in September after rising by 122,000 in August. Manufacturing shed 2,000 jobs last month, the first decline in factory payrolls since March, after hiring 2,000 workers in August.

Factory employment growth has slowed from last year’s brisk pace. Manufacturing has ironically borne the brunt of the Trump administration’s trade war, which the White House has argued is intended to boost the sector.

Last month’s decline in manufacturing payrolls was led by the automotive sector, which lost 4,100 jobs. There were also job losses in machinery, fabricated metals products and primary metal industries.

Construction employment increased by 7,000 jobs last month after rising by 4,000 in August. Retail payrolls dropped by 11,400 jobs, shedding employment for an eight straight month.

Government employment increased by 22,000 jobs in September after surging by 46,000 in August. Hiring was boosted by state and local governments. Only 1,000 workers were hired last month for the 2020 Census. Government payrolls have increased by 147,000 over the year, driven by local governments.

((Reporting by Lucia Mutikani; Editing by Sandra Maler and Paul Simao))