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Job creation for August was a huge disappointment, with the economy adding just 235,000 positions, the Labor Department reported Friday.

Economists surveyed by Dow Jones had been looking for 720,000 new hires.

The unemployment rate dropped to 5.2% from 5.4%, in line with estimates.

August’s total — the worst since January — comes with heightened fears of the pandemic and the impact that rising Covid cases could have on what has been a mostly robust recovery. The weak report could cloud policy for the Federal Reserve, which is weighing whether to pull back on some of the massive stimulus it has been adding since the outbreak in early 2020.

“The labor market recovery hit the brakes this month with a dramatic showdown in all industries,” said Daniel Zhao, senior economist at jobs site Glassdoor. “Ultimately, the Delta variant wave is a harsh reminder that the pandemic is still in the driver’s seat, and it controls our economic future.”

Leisure and hospitality jobs, which had been the primary driver of overall gains at 350,000 per month for the past six months, stalled in August as the unemployment rate in the industry ticked higher to 9.1%.

Instead, professional and business services led with 74,000 new positions. Other gainers included transportation and warehousing (53,000), private education (40,000) and manufacturing and other services, which each posted gains of 37,000.

Retail lost 29,000, with the bulk coming from food and beverage stores, which saw a decrease of 23,000.

“The weaker employment activity is likely both a demand and supply story — companies paused hiring in the face of weaker demand and uncertainty about the future while workers withdrew due to health concerns,” Bank of America economist Joseph Song said in a note to clients.

The report comes with the U.S. seeing about 150,000 new Covid cases a day, spurring worries that the recovery could stall heading into the final part of the year.

“Delta is the story in this report,” said Marvin Loh, global macro strategist for State Street. “It’s going to be a bumpy recovery in the jobs market and one that pushes back against a more optimistic narrative.”

The month saw an increase of about 400,000 in those who said they couldn’t work for pandemic-related reasons, pushing the total up to 5.6 million.

“Today’s jobs report reflects a major pullback in employment growth likely due to the rising impact of the Delta variant of COVID-19 on the U.S. economy, though August is also a notoriously difficult month to survey accurately due to vacations,” said Tony Bedikian, head of global markets at Citizens.

Still, the news wasn’t all bad for jobs.

The previous two months saw substantial upward revisions, with July’s total now at 1.053 million, up from the original estimate of 943,000, while June was bumped up to 962,000 from 938,000. For the two months, revisions added 134,000 to the initial counts.

Also, wages continued to accelerate, rising 4.3% on a year-over-year basis and 0.6% on a monthly basis. Estimates had been for 4% and 0.3% respectively.

An alterative measure of unemployment that includes discouraged workers and those holding part-time jobs for economic reasons fell sharply, dropping to 8.9% in August from 9.6% in July.

The labor force participation rate was unchanged at 61.7%, still well below the 63.3% in February 2020, the month before the pandemic declaration.

Employment also remained well below pre-Covid levels, with 5.6 million fewer workers holding jobs and the total workforce still smaller by 2.9 million.

Another key Fed metric, the employment-to-population gauge, stood at 58.5%, up one-tenth of a percentage point from July but still well below the 61.1% pre-pandemic level. The measure looks at total jobholders against the working-age population.

August’s numbers have been volatile in past years and often see substantial revisions. They come amid other positive signs for employment.

Weekly jobless filings have fallen to their lowest levels since the early days of the pandemic in March 2020, but a large employment gap remains.

It’s not that there aren’t enough jobs out there: Placement firm Indeed estimates that there are about 10.5 million openings now, easily a record for the U.S. labor market. ZipRecruiter on Friday noted sharp gains in job postings for travel, arts and entertainment and education, generally signaling that those sectors should see strong gains ahead.

Fed officials are watching the jobs numbers closely for clues as to whether they can start easing back some of the policy help they’ve been providing since the pandemic started.

In recent weeks, central bank leaders have expressed optimism about the employment picture but said they would need to see continued strength before changing course. At stake for now is the Fed’s massive monthly bond-buying program, which could start getting scaled back before the end of the year.

However, if the jobs data gets softer, that could prompt Fed officials to wait until 2022 before tapering its purchases. Fed officials have been clear that interest rate hikes will come well after tapering starts.

“I still expect them to taper by year end,” said State Street’s Loh. “Maybe some of the more aggressive conversations about something happening in September are off the table. I think November is still a possibility.”

The Fed meets next on Sept. 21-22.

The hiring blitz at bars, restaurants and hotels came to an abrupt halt in August as more Covid-19 cases and a scarcity of willing workers kept employers from adding to payrolls.

The broad leisure and hospitality sector, which includes restaurants and lodging, added a net of zero jobs last month. That’s a remarkable stop to a sector that had jumped by an average 350,000 per month over the prior six months.

A closer look within the sector shows a loss of 42,000 jobs in food services and drinking places offset by a gain of 36,000 jobs in arts, entertainment and recreation.

The headline numbers from the August jobs report showed the U.S. economy added just 235,000 jobs last month, well short of the 720,000 expected. The unemployment rate fell from 5.4% to 5.2%. CNBC studied the net changes by industry for August jobs based on data contained in the government’s employment report.

The Labor Department noted the flat employment in leisure and hospitality coincided with a drop in consumer confidence, which fell in part due to concerns about rising Covid cases last month due to the delta variant.

Leisure and hospitality added 2.1 million jobs from February through July — half of all U.S. jobs added over that period. The Bureau of Labor Statistics said leisure and hospitality employment is 10% below where it was in February 2020.

The “headline number is obviously disappointing – much lower than expectations – and markets will react. But the interesting question is why the number is so low,” Commonwealth Financial Network chief investment officer Brad McMillian wrote.

“Looking at the unemployment and underemployment numbers, which dropped, as well as the labor force participation rate, it looks to have come from workers electing not to enter the workforce,” he added. “This ties the shortfall to the pandemic, again, rather than to general economic weakness.”

Retail trade, which has lost jobs over several years, shed 28,500 positions in August. Food and beverage stores, as well as building material and garden supply stores, saw net job losses of 23,200 and 13,000, respectively.

Building and garden shops likely saw payrolls decline ahead of the cooler months and a deceleration in Covid-era at-home projects.

On the upside, manufacturers had a decent month with 37,000 new jobs amid strong hiring at transportation equipment makers. Factories that produce cars and car parts saw some of the sector’s strongest numbers, up 24,100.

Transportation and warehousing came out best in August with a gain of 53,200 net payrolls. The Labor Department said warehouses and other storage facilities added 20,200 jobs while air transportation advanced by 11,400.

— CNBC’s Nate Rattner contributed reporting.

U.S. economist Joseph Stiglitz believes now is a good time to rewire the U.S. economy, arguing that “we shouldn’t let a crisis go to waste.”

The former senior vice president and chief economist of the World Bank said on Thursday that the coronavirus pandemic has highlighted how the economic system isn’t working, referencing inequality, the climate crisis and the lack of resilience of the market economy.

Stiglitz said he’s optimistic that many existing problems can be tackled simultaneously, since they’re related.

“You can get a two-for-one,” he told CNBC’s Steve Sedgwick at the annual Ambrosetti Forum on the shores of Lake Como in Italy.

The U.S. should, for example, invest in building “green” infrastructure that creates jobs and helps bring down inequality, Stiglitz said. “Once you put your mind to it, you realize that we can attack two or three of these problems simultaneously,” the 78-year-old said, adding that the U.S. has the labor and the capital.

Stiglitz said it would be “healthy” for the U.S. economy to raise taxes “a little bit” to finance “some of the things we need for the common good.”

In July, 130 countries backed a global minimum corporate tax rate of 15%, and Stiglitz said that move has ended the race to the bottom on taxes, highlighting how the U.S. is considering a 25% rate.   

A successful economy is not defined just by tax rates but also by other factors such as infrastructure and research and development efforts, Stiglitz said.

He said there’s a growing consensus that the U.S. needs to change outdated laws that have been in place for 125 years and address excessive market power across the whole of America. “The concentration of market power has increased enormously in the last 35 years” he said.

Overregulation and overtaxing won’t see the West lose its competitive edge to emerging powers and China, according to Stiglitz. “I’m actually quite confident that this new agenda will actually strengthen us,” he said.

Competition makes market economies more innovative, while monopolies reduce innovation, Stiglitz said. “We’ve seen how the big giants actually squash innovation,” he said.