So much for an improvement in the labor market.

The unemployment rate rose to 9.6% last month from 9.5% in July, the Labor Department said Friday. August marked the 16th consecutive month with national unemployment above 9% and the first increase in four months.

Although investors cheered a smaller than expected decline in total payrolls, the Labor report suggests job growth remains elusive despite the stimulus bill, Federal Reserve backing and rising cash reserves in the private sector.

In August, an uptick in hiring within the private sector couldn't offset the end of more temporary government jobs and a surge in the number of people looking for work.

The federal government shed 114,000 temporary workers hired for the Census -- about on par with analysts' projections. Meanwhile, the private sector added more than 67,000 jobs, surpassing analysts' expectations of 25,000 to 40,000.

Investors are looking closer at the private sector, where hiring needs to pick up in order to sustain the recovery. Friday's report suggests that private employment is rising but at a slow pace. In a healthy market, the economy would add at least 100,000 jobs each month. Year to date, private sector employment has increased by 763,000, with most of the gains coming in the spring. Wages are also growing slowly. Average hourly earnings of private employees increased 0.3%, or six cents, to $22.66 in August. In total, over the past year average hourly earnings have increased by 1.7%.

August's marginally higher unemployment rate may signal a shift in job searching patterns, says Robert Johnson, director of economic analysis at Morningstar. The rise could signal a return to the job search for unemployed individuals who had previously given up on finding work, he says.

The civilian labor force grew by 550,000 in August. At the same time, the number of discouraged workers declined to 1.11 million, down from 1.18 million in July -- but still higher than 758,000 a year ago.

On Tuesday, the Conference Board reported that consumer confidence unexpectedly rose to 53.5 in August from 51.0 in July. "This could suggest that more people are looking for work," Johnson says.

For investors, the unemployment rate serves as one of the biggest indicators of an uncertain economy and a contributor to market volatility. "The main thing that has to happen is businesses out there start hiring again," says Johnson. The August report sheds more light on the sectors that are hiring the most and likely growing capital. Some of the largest gains came in the health care industry, which added 28,000 jobs in August, and construction, which added more than 19,000 new positions.

Manufacturing payrolls declined by 27,000, however a separate report indicates an improvement on the horizon. On Wednesday, the Institute for Supply Management reported that the purchasing managers' index reached 56.3% last month, up from 55.5% in July. August marked the 13th consecutive month of readings over 50%, the benchmark for sector growth.