A surprise leap in jobs, wages

NEW YORK (CNNMoney.com) -- Recent concerns about a weakening U.S. economy took a step back Friday morning as the closely watched December employment report showed much stronger job and wage growth than had been expected.

Employers added 167,000 jobs to U.S. payrolls in December, up from 154,000 in November, which was revised higher, the Labor Department reported. Economists surveyed by Briefing.com had forecast only a 100,000 rise in payrolls in December.

The unemployment rate stayed at 4.5 percent, in line with economists' forecasts.

The average hourly wage jumped 8 cents, or 0.5 percent, to $17.04, versus forecasts for a 0.3 percent increase. The November wage gain was also revised higher.

The wage gain left average hourly wages up 4.2 percent from a year earlier - well above the pace of inflation, which rose only 2 percent in the 12 months ended in November, according to a separate government reading.

The report follows other job readings, including a survey by payroll service ADP, which had suggested private sector employment would take a step back. The Federal Reserve also released minutes this week that showed concern by policy-makers at the central bank about an economic slowdown ahead.

On Wall Street, stock and bond prices fell as the report raised inflation concerns and dashed hopes that the Fed might cut interest rates soon.

The Dow industrials fell about 0.5 percent in morning trading while Treasury bond prices sank.

"Stock traders basically got a little bit of good news on employment front since they were worried about weakness, but they'll be concerned about the wages," said Anthony Chan, chief economist for JPMorgan Private Client Services.

Chan said the report could show that consumers will keep spending at higher than expected levels, which could limit any expected slowdown in the economy this year. "Betting against consumers is like betting against the house at the casino," he said.

But Chan and Gus Faucher, director of macroeconomics, Moody's Economy.com, both said the stronger employment and wage numbers suggest that the Fed is unlikely to cut rates soon, as some investors had been hoping.

"I don't' think we'll see a hike anytime soon, but it pushes the chance of the cut into at least second half of this year," said Faucher. He said rates may even stay unchanged through all of 2007.

Areas of the economy showing job growth included education and health services, professional and business services, and leisure and hospitality.

The Bush administration hailed the report as it faces the new Congress controlled by Democrats who have a different view on economic policy.

"This is further evidence that the president's economic policies are working and producing strong wage gains for America's workers, and we should be cautious of future policies that would slow these gains," Labor Secretary Elaine Chao said in a statement.

Despite last month's pickup in job growth, the labor market is also showing some signs of weakness.

Job growth totaled 407,000 jobs for the fourth quarter, down from 443,000 in the third quarter. And the gain for all of 2006 was 1.8 million, down from about 2.0 million in 2005.

For the month, the report showed a 3,000 job decline in construction, despite unseasonably warm weather that probably helped keep contractors and their employees working longer than usual. There was also a 12,000 drop in manufacturing employment. Neither drop was a surprise given the widely reported slowdowns in home building and U.S. automaking.

General Motors (Charts) and Ford Motor (Charts) have both been cutting hourly staff through buyouts and retirement offers, and Ford and DaimlerChrysler's (Charts) Chrysler Group slashed fourth-quarter production due to excess inventory of their pickup trucks.

In addition, home builders have cut back on new permits, indicating a scale down of building plans. Lennar (Charts), a leading home builder, has been cutting back on forecasts for future building as orders fall, joining recent warnings from other builders.

The report also reported a seasonally adjusted 9,000 job decline in retail, despite the holiday shopping season. That's partly due to retailers doing less additional hiring than forecast by the Labor Department's models - the non-seasonally adjusted numbers show a 161,500 job gain in the sector.

Part of the weaker retail numbers could be due to more modest gains in December sales than seen in recent years.

In addition, major retailers have learned how to get by with fewer employees than in the past. The Wall Street Journal reported this week that Wal-Mart Stores (Charts), the nation's largest private sector employer, will use a more flexible schedule that will limit its staffing levels to peak shopping periods.

Skilled worker shortage curbing growth