The recent pattern of jobs suggests that the economy hit a brick wall in May. It added an average of 215,000 jobs per month in the three months ended April, but only 22,000 per month in May and June. Supply-chain disruptions and bad weather are unconvincing as explanations for the extent of the weakness. A delayed response to the cumulative impact of surging commodity costs during the first half of the year is a more plausible explanation, but this report has dashed hopes that the economy was about to accelerate again now that those costs have eased back.

The employment report is showing a much bleaker picture than other indicators (such as the ISM surveys and the ADP employment survey). We must hope that it is overstating the extent of the slowdown in the economy, or that employment is showing its normal lagged response to slower growth and will pick up with growth in the second half. At face value, it shows stagnation now.

For policymakers, this news has clear implications. The economy does need a long-term deficit reduction plan, but it does not need fiscal austerity now. And more bad news like this in coming months will bring more quantitative easing (QE III) onto the agenda at the Federal Reserve.

In the payroll details, manufacturing added 6,000 jobs, after losing 2,000 in May. Durable goods added 15,000 jobs (concentrated in fabricated metals and machinery, as in May), but nondurables lost 9,000. Overall manufacturing production-worker hours fell 0.3%, pointing to only a weak increase in manufacturing output for June or even a decline. Construction lost 9,000 jobs, all in the residential sector.

There was a broad-based deceleration in private services employment growth to 53,000 this month, from 73,000 in May. The only good news was in leisure and hospitality, which added 34,000 jobs, and professional and technical jobs (up 24,000). Financial services lost 15,000 jobs (reversing May's 14,000 increase) and education lost 17,000 jobs. There was still a contribution from the health sector (up 14,000), but less than usual. Temporary jobs fell 12,000.

The government sector shed 39,000 jobs, of which 25,000 were in state and local government. State employment was down 7,000 and local government was down 18,000, with the bulk of the losses in education. Federal jobs fell 14,000, their biggest monthly decline since the temporary Census workers disappeared last year.

The private workweek fell to 34.3 hours, from 34.4 hours. The stability of the workweek had been one saving grace of May's weak report; it did not hold up in June. A shorter workweek combined with only a small increase in private employment to generate a 0.3% decline in hours worked in June, the first drop since November 2010. Hours still rose 3.3% annualized in the second quarter, much faster than the 2.0% increase in the first quarter. But since GDP growth appears to have been roughly the same in the second quarter as in the first (at 1.9%), the implication is that productivity actually fell in the second quarter. Firms seem to be finding it more difficult to squeeze more output from their existing workforces.

Average hourly earnings were flat on the month and up 1.9% on the year—well short of headline inflation, and highlighting that wage inflation is being held down by the high unemployment rate. Total payrolls fell 0.3%, pointing to a similar decline in wages and salaries for the month, which is bad news for consumer spending power.

The unemployment rate rose from 9.1% to 9.2%. There was a huge 445,000 decrease in household employment, which outweighed a 272,000 drop in the labor force. We still expect the unemployment rate to edge down over the rest of 2011, but only to about 8.7% by year-end. The most comprehensive measure of underemployment (U-6)—which includes workers who would like a job but are not currently looking, plus those working part time who would rather work full time—rose from 15.8% to 16.2%.

We still take the view that we are seeing a soft patch within an underlying modestly paced recovery, but this weak report increases the risk that any acceleration in growth during the second half of the year (prompted by lower commodity prices and reviving vehicles production) will come late or not at all.

For policymakers, the implications of today's report are clear. The Fed should be reviewing the quantitative easing playbook to ensure that plans are ready for a third round. One month's sluggish employment report (May) did not clear the hurdle required to bring QE III onto the agenda; two weak months gets closer.

For the federal government, the prime objective should be to avoid adding any self-inflicted wounds to the economy's existing problems. In an ideal world that would mean raising the debt ceiling immediately. In reality, the negotiations will probably go down to the wire, but the message from the economy is that it is too weak to withstand a heavy and immediate dose of fiscal austerity. Fiscal support for the economy is already unwinding as previous stimulus spending runs down. A plan to stabilize the ratio of public debt to GDP over the long term is badly needed; an immediate fiscal contraction is not. More rather than less stimulus is what is needed now.