WASHINGTON (Reuters) - Employers hired fewer workers than expected in December and a surprisingly large number of people gave up searching for work, tempering the positive news of a big drop in the unemployment rate.
The disappointing jobs growth figure reported by the Labor Department on Friday suggested the Federal Reserve would likely stay the course with its effort to support the world’s biggest economy with the purchase of $600 billion in government bonds.
The department’s survey of nonfarm employers showed payrolls increased 103,000 last month, below economists’ expectations for 175,000. Private hiring rose 113,000, while government employment fell 10,000.
“What we are seeing is a pace of hiring that is enough to keep us on track, where we stand, which has been a moderate recovery, but not really enough to point to an acceleration from here,” said Julia Coronado, a senior economist at BNP Paribas in New York.
Disappointment over the employment gains and a court ruling in a key foreclosure case resulted in a marginal drop in U.S. stock indexes, while prices of safe-haven U.S. government debt rose. The dollar advanced against a basket of currencies.
Softening the blow, overall employment for October and November was revised to show 70,000 more job gains than previously reported. An independent survey this week had led investors to anticipate sturdy payroll gains in December.
The unemployment rate fell to 9.4 percent, the lowest since May 2009 and down from 9.8 percent in November. It was the biggest monthly drop in the rate since April 1998.
But the survey of households from which the unemployment rate is derived showed the big drop was due to both an increase in employment and a sharp decline in the labor force.
“The Fed will not take much comfort in the decline in the unemployment rate when it is not driven by job growth,” said Coronado.
The slow labor market recovery, which is in stark contrast with other sectors of the economy, is unwelcome news for President Barack Obama, whose administration has struggled to boost employment. High joblessness cost his Democratic Party control of the U.S. House of Representatives.
Announcing a new economic adviser, Obama said the trend for job growth was up, but added that more needed to be done.
“We’ve got a big hole that we’re digging ourselves out of. And so our mission has to be to accelerate hiring and to accelerate growth,” he said.
Fairly upbeat data on consumer spending, trade and manufacturing have pointed to a strengthening in the economy and Fed Chairman Ben Bernanke struck a slightly more optimistic tone when he appeared before lawmakers on Friday.
“We have seen increased evidence that a self-sustaining recovery in consumer and business spending may be taking hold,” Bernanke told the Senate Budget Committee.
But he cautioned that if the economy continued to create jobs “at this pace we’re not going to see sustained declines in the unemployment rate.
The economy created an average of 94,000 jobs a month last year, far short of the minimum 125,000 needed to keep the jobless rate from rising. A faster pace might be needed now with so many discouraged workers sitting on the sidelines.
As job growth picks up, these workers could re-enter the labor force, keeping upward pressure on the jobless rate.
Data showing a firming in consumer and business demand had led to calls for the U.S. central bank to scale back its widely criticized bond-purchasing program, aimed at keeping interest rates low to boost demand.
Some policymakers indicated in December they had a “fairly high” threshold for curtailing the stimulus program.
A separate report on Friday showed consumer credit rose in November for the second straight month after 20 months of declines, which could bode well for spending.
Though some analysts looked at the drop in the unemployment rate as good news, the labor force participation rate — a measure of how many potential workers are actually in the job market — fell to 64.3 percent, yet another fresh cycle low.
“Yes, we are getting more people employed but we appear to be losing people into the woodwork — not a good sign long term,” said John Silvia, chief economist at Wells Fargo.
Still, economists remain optimistic employment will pick up this year, citing the recently agreed-upon $858 billion tax package, which is expected to boost 2011 gross domestic product growth by at least one percentage point.
Employment gains in December were led by the private services sector, where payrolls rose by 115,000 after gaining 84,000 in November, but temporary hiring slowed. Temporary hiring is seen as a harbinger of permanent employment.
The goods-producing sector shed 2,000 jobs in December after losing 5,000 in November, but manufacturing payrolls rose for the first time in five months. Construction employment fell again last month, but some of the drop could be related to adverse weather conditions in some parts of the country.
Additional reporting by Glenn Somerville, Pedro da Costa, Emily Kaiser and Alister Bull in Washington; Editing by Andrea Ricci and Dan Grebler