Job Market Ends 2006 on Strong Note

By JEREMY W. PETERS

Published: January 5, 2007

Businesses added workers to their payrolls at a healthy clip last month, and their average pay rose faster than inflation — further evidence of strength in the job market despite a slowdown in the economy.

The Labor Department reported this morning that businesses added 167,000 jobs outside the farming sector in December, seasonally adjusted — more than enough to absorb natural growth in the work force. The figures for October and November were revised upward as well. The strong numbers surprised Wall Street, which had been expecting a gain of only 100,000 jobs in December.

The national unemployment rate remained unchanged at 4.5 percent. Those who were unemployed in December were out of work for a shorter period of time, on average, than in November. And the percentage of the total American population holding jobs rose to 63.4 percent, the highest level in more than five years.

Average wages have been outpacing inflation by enough of a margin in recent months that workers are seeing some of the biggest real gains in their paychecks in four years. Much of the credit goes to the fall in energy prices since the summer, which has brought overall inflation down and allowed the average worker’s pay to go farther.

Tightness in the job market has been driving wages upward, economists say. With unemployment so low — the 4.4 percent reading in October was the lowest in five years — employers have found themselves having to bid up pay a bit to fill vacancies.

Compared with the same month a year earlier, average hourly wages were up 4.2 percent in December, the government reported today. The figure for November was revised up slightly to the same rate in today’s report; they are the highest readings since February 2001. The average number of hours worked was unchanged in December.

Today’s labor market report apparently disappointed many investors, who had been hoping that the slowdown in economic growth would prompt the Federal Reserve to start cutting interest rates. On Wall Street, stocks fell in morning trading as bond prices dropped sharply, both indications that many investors no longer believe that interest rates will be cut any time soon.

Earlier this week, newly released minutes from the Fed’s December policy meeting indicated that a majority of central bankers believe inflation remains too high, even though it has moderated recently, and that price worries overshadow any concerns about a slowing economy. Rising wages and a strong labor market are likely to be seen as adding to the inflationary pressures.

Even so, not all areas of the job market were robust last month. With the housing market in a slump, builders barely added any jobs in December, after cutting jobs in October and November. Downsizing in the American auto industry helped contribute to an overall decline in manufacturing jobs last month. For the year, manufacturers shed a net 72,000 jobs.

But the services sector of the economy showed considerable strength. Professional and business services added a net 50,000 jobs last month; health care providers added 31,000 new jobs, and so did hospitality businesses like restaurants and bars.

“These data purport to show very little cross-infection from the manufacturing slowdown and construction crunch into the rest of the economy,” said Ian Shepherdson, chief United States economist with High Frequency Economics, in a research report today. “This does not mean it will not happen in the future, but it does mean that the pressure we expected to see on the Fed to ease in the first quarter has not yet materialized.”