The Labor Department reported Friday that nonfarm payrolls declined in the first month of the year by 17,000. Economists on Wall Street were forecasting an increase of 65,000. The last decline was August 2003, though the Labor Department last August had initially had reported a loss of 4,000 jobs before later revising it to a gain.

"These poor jobs data are the strongest evidence so far that the economic expansion is grinding to a halt," said Peter Morici, a business professor with the University of Maryland.

Despite the report, stocks moved higher on news that Microsoft (MSFT - Cramer's Take - Stockpickr) is offering $44.6 billion to acquire Yahoo! (YHOO - Cramer's Take - Stockpickr), the Web search firm that has struggled to compete with Google (GOOG - Cramer's Take - Stockpickr).

Meanwhile, the Institute for Supply Management reported its January index of manufacturing activity jumped unexpectedly to 50.7 from December's reading of 48.4. Wall Street was expecting a decline to 47, which would indicate a contraction in the manufacturing sector.

The government said construction spending in December declined by 1.1%, reflecting weakness in the housing market. Economists were forecasting a smaller drop-off.

Also, the University of Michigan's consumer sentiment index fell more than expected in January to 78.4.

The nation's unemployment rate, as measured by the government, ticked lower to 4.9% from 5%.

Weakening labor conditions in the employment report were widespread across sectors like manufacturing, construction and finance, suggesting that the recent declines in the U.S. housing market -- unlike any on record since World War II -- are causing economic woes across the board throughout the nation.

Wage growth also slowed, suggesting that U.S. workers are struggling to balance their budgets with fuel prices soaring and the value of the dollar going down.

Average hourly earnings rose for the month to $17.75 in January, a 0.2% increase from the previous month. Economists were predicting a slightly larger gain of 0.3%. Over the last 12 months, wages grew by 3.7%.

The December nonfarm payroll increase was revised up to a gain of 82,000 jobs from the previously reported gain of 18,000 jobs. November payrolls were revised down by 55,000 jobs.

The economy added an average of just 95,000 jobs a month in 2007, a weak number in the context of growth in the labor force.

"The bottom line is that labor markets remain slack enough to keep wage increases down," said Morici. "Productivity growth should accommodate those increases and rising energy prices, the Federal Reserve can focus on managing the credit crisis and staving off a recession, if that is possible."

The report marked an ominous start of a presidential election year for incumbent politicians. The U.S. Congress is currently negotiating an economic stimulus package that's expected to include some forms of tax relief. The effort has support from President Bush and Federal Reserve Chairman Ben Bernanke.

Bernanke's Fed has slashed its key interest rate target by 125 basis points so far this year -- the largest one-month move by the central bank in over two decades. In addition to recession fears, that Fed is responding to a breakdown in the world's credit markets that began last summer when defaults on subprime home loans in the U.S. began to spike.