Job growth tops forecasts

NEW YORK (CNNMoney.com) -- The job market kept humming along last month with few signs that the slowdown in the housing market has made much of a dent in hiring, according to the government's employment report Friday.

Employers added 132,000 jobs to payrolls in June, the Labor Department said, down from a revised gain of 190,000 in May. The April figure was also revised higher and the revisions together added about 75,000 jobs jobs to the department's previous estimates for those two months.

The June reading came in a bit better than the 125,000 average forecast by economists surveyed by Briefing.com.

The unemployment rate held steady at 4.5 percent, matching forecasts.

But especially with the upward revision to April and May payrolls, Friday's report was seen as stronger than expected, raising concerns on Wall Street that the Federal Reserve's next move on interest rates might be to raise them to cool the economy and inflationary pressures.

Stocks opened slightly lower and Treasury bond prices fell after the report, lifting the yield on 10-year notes to 5.18 percent from 5.14 percent late Thursday. Bond prices and yields move in opposite directions.

John Silvia, chief economist for Wachovia, said strength in the job market is now leading him to put the chance of a Fed rate hike by year-end at 25 percent, up from about 10 percent or less before the report.

"Construction is not the drag we all have been expecting," Silvia said. "The combination of wage growth and payroll growth suggests that spending will stay pretty solid and the third quarter won't be all that soft. All of this is telling me that the economy is not booming, but it probably has more momentum than the Fed is comfortable with at this point."

In its report, the department said wages rose 6 cents, or 0.3 percent, to $17.60 an hour. That left the average hourly wage up 3.9 percent from a year earlier, above the 2.7 percent rate of inflation for the 12 months ending in May.

The report seemed to contain some contradictions about the job market and various sectors of the economy.

Retailers trimmed 24,000 jobs, for example, despite generally strong June sales reported by major store chains. And there was a gain of 12,000 jobs in construction despite the weakness in the home building market as non-residential construction payrolls grew, while employment in residential construction was flat.

But not everyone was so sure Friday's report means the job market is immune to the weak housing market.

Gus Faucher, director of macroeconomics at Moody's Economy.com, said he still expects the Fed to hold rates steady as it has since June 2006. He noted that employment is a lagging economic indicator and that weakness in housing will probably show up in future reports.

"I think that we're still seeing the contraction in housing, even if it's taking longer to play out in terms of employment than we thought," he said. "Everything (the Fed has said) and I agree, suggests that the economy has slowed enough to bring down inflationary pressure."