WASHINGTON (Reuters) - The U.S. economy added the fewest number of jobs in seven months in April and Americans dropped out of the labor force, signs of weakness that left some economists anticipating only one interest rate hike from the Federal Reserve this year.

Nonfarm payrolls increased by 160,000 jobs last month as construction employment barely rose and the retail sector shed jobs for the first time since December 2014, the Labor Department said on Friday.

April’s job gains were the smallest since September and below the first-quarter average job growth of 200,000. Adding to the report’s soft tone, employers added 19,000 fewer jobs in February and March than previously reported.

The slowdown in hiring came against the backdrop of weak economic growth, subdued productivity and corporate profits. It prompted some financial institutions, including Bank of America Merrill Lynch and Barclays, to lower their interest rate hike expectations for this year to one from two before the report.

“We now only expect one rate hike in 2016, in September, as we believe it will take longer for policymakers to accumulate sufficient evidence that economic and labor market activity is rebounding after a soft start to the year,” said Michael Gapen, chief economist at Barclays in New York.

The Fed raised its benchmark overnight interest rate in December for the first time in nearly a decade. Fed officials have forecast two more rate hikes for this year. Economists had expected the first of the two increases in June.

A Reuters survey of Wall Street banks that directly do business with the Fed showed nine out of 17 expected the U.S. central bank to tighten monetary policy twice this year. This compared to 12 of 16 banks a month ago.

Market-based measures of Fed policy expectations have virtually priced out an interest rate increase at the Fed’s June 14-15 meeting, according to CME Group’s FedWatch. They see a 42 percent probability of a rate increase in September and a 61 percent chance at the December meeting.

New York Fed President William Dudley, however, told the New York Times on Friday that two rate hikes remained a “reasonable expectation.”

The dollar initially fell against a basket of currencies on the employment report, but retraced losses after Dudley’s comments. Prices for U.S. government debt fell, while stocks on Wall Street reversed earlier losses to end higher.

Though the unemployment rate held at 5.0 percent last month that was because people dropped out of the labor force. The stepdown in job gains could temper expectations of a strong rebound in economic activity in the second quarter after growth nearly stalled in the first three months of the year.

Economists had forecast payrolls rising 202,000 last month.

SILVER LININGS

There were some silver linings in the report, with both average hourly earnings and the average work week rising.

Average hourly earnings increased eight cents or 0.3 percent. That took the year-on-year increase to 2.5 percent from 2.3 percent in March, still below the 3.0 percent advance that economists say is needed for inflation to rise to the Fed’s 2.0 percent target.

The average work week increased to 34.5 hours from 34.4 hours in March. The 0.4 percent increase in aggregate hours and higher earnings left workers with a 0.7 percent increase in their take-home wages, which should support consumer spending.

Economists said the moderation in job creation was not surprising, citing weak business investment and a shortage of skilled workers in areas like construction.

Moushumi Paul (R) of the USDA interviews job applicant Sherry Rose (L) at a U.S. Chamber of Commerce Foundation "Hiring Our Heroes" military job fair in Washington January 8, 2016. REUTERS/Gary Cameron

“Without business growth and development, there is little support for robust job creation. This morning’s report suggests we may already be seeing early signs of at least a modest slowdown in the pace of employment,” said Lindsey Piegza, chief economist at Stifel Fixed Income in Chicago.

Other economists saw the slowdown in employment last month as payback for mild winter weather, which had seen strong hiring in retail and construction sectors in the first quarter.

Details of the smaller household survey from which the unemployment rate is derived were mostly weak.

The labor force participation rate, or the share of working-age Americans who are employed or at least looking for a job, fell 0.2 percentage point to 62.8 percent. It had increased 0.6 percentage point since dipping to 62.4 percent in September.

The labor force fell by 362,000 as people dropped out in April. The labor force had increased 2.4 million in the prior six months.

The employment-to-population ratio fell to 59.7 percent in April from a seven-year high of 59.9 percent in March. But a broad measure of unemployment that includes people who want to work but have given up searching and those working part-time because they cannot find full-time employment slipped one-tenth of a percentage point to 9.7 percent last month. The larger establishment survey showed the vast private services sector dominated employment gains in April, adding 174,000 jobs. Retail payrolls fell 3,100 last month after hefty gains in the first quarter, which came despite sluggish sales.

Information sector employment was unchanged last month and a Labor Department official said there was no sign that a strike by about 40,000 Verizon workers had impacted the data.

Manufacturing added 4,000 jobs after shedding 29,000 in March, the biggest loss for the sector since December 2009.

There were further job losses in mining as the energy sector adjusts to weak profits from a recent prolonged plunge in oil prices. Mining payrolls fell 8,000 last month. Mining employment has decreased by 191,000 jobs since peaking in September 2014, with 75 percent of the losses in support activities.

Gains in construction employment slowed sharply, with the sector adding 1,000 jobs in April, after home building showed some signs of fatigue last month. Government payrolls fell 11,000 last month.