The U.S. economy lost jobs in September for the first time in over two years as the economic disruption from hurricane spread to the job market.

The U.S. Labor Department said Friday that nonfarm payrolls declined by 35,000 jobs during September. That marked the first decline since May 2003, when the labor market was struggling to get back on its feet after being set back by the 2001 recession. The drop in September was the largest since a decline of 54,000 jobs in April 2003.

The damage to payrolls was less severe than 175,000-job decline economists had predicted.

Furthermore, the drop came as job creation in earlier months was revised upward. The Labor Department said the economy added 211,000 jobs in August and 277,000 jobs in July — up from previous estimates showing a 169,000 increase in August and a 242,000 increase in July.

The U.S. unemployment rate climbed to 5.1% in September, up from August’s 4.9% and 5.0% in July.

The Labor Department didn’t break out job losses specifically attributable to Katrina.

Jobs in the retail industry took the biggest hit in September, falling by 88,000.

Manufacturers, meanwhile, continued to cut jobs for the fourth month in a row. Factories eliminated 27,000 jobs in September.

Employment in health care grew by 37,000 in September and construction employment rose by 23,000 jobs. Professional and business services employment went up by 52,000.

Meanwhile, U.S. wholesale inventories rose by 0.5% to a seasonally adjusted $354.51 billion, after rising a revised 0.1% in July, the U.S. Commerce Department said today July inventories were originally reported down 0.1%.