Job growth slows to 97,000 in February

Unemployment rate unexpectedly falls back to 4.5%

WASHINGTON (MarketWatch) -- Hit by wintry weather in February, the U.S. economy created the fewest jobs in two years, even as the unemployment rate fell to 4.5%, the Labor Department reported Friday.

Nonfarm payrolls increased by 97,000, trivially lower than the 100,000 expected by economists surveyed by MarketWatch and the lowest since January 2005, but traders may have been expecting a much weaker number.

"The prevailing sentiment seems to be 'it could have been worse,'" wrote Richard Moody, chief economist for Mission Residential.

The housing and factory sectors continued to shed jobs in February, reflecting the overall weakness in the goods-producing side of the economy, which had sparked fears of an incipient recession among some traders last week. But, with the services-side of the economy adding jobs in February, the worst of those fears was allayed, said Mike Englund, chief economist for Action Economics.

While job growth was relatively weak in February, other aspects of the report pointed toward a tight labor market. Bond prices fell, while stocks opened higher as the report came in stronger than some expected. The dollar gained ground.

Payroll growth in the previous two months was revised higher by a total of 55,000. January's payrolls were revised up to 146,000 from 111,000. Read the full government report.

The drop in the unemployment rate to 4.5% from 4.6% was unexpected. The unemployment rate has drifted between 4.4% and 4.6% for six months.

The jobless rate fell to 4.5% from 4.6% because people dropped out of the labor force, not because unemployed workers got jobs. According to a survey of 60,000 households, the labor force fell by 190,000 in February, the biggest drop in more than three years. Employment fell by 38,000. Unemployment fell by 152,000 to 6.9 million. The labor participation rate fell a tenth to 66.2%.

Average hourly earnings increased a larger-than-expected 6 cents, or 0.4%, bringing the year-over-year gain to 4.1%. Higher wages could fuel inflation, Fed officials fear.

A blast of cold and wet weather in February after two months of relatively balmy conditions "likely contributed" to job losses in construction, said Philip Rones, deputy commissioner of the Bureau of Labor Statistics, in a statement.

Construction jobs fell by 62,000 in February, including 23,000 in residential-construction trades.

The weather may have also contributed to a six-minute decline in the average workweek to 33.7 hours. Total hours worked in the economy fell by 0.3%.

"After taking into account the weather-related distortions in the data, the report suggests that the labor market is holding together reasonably well at this point," wrote David Greenlaw and Ted Wieseman, economists for Morgan Stanley, in a note to clients. "Indeed, if conditions return to normal in March, we would expect to see a snapback in job growth."

Factory payrolls fell by 14,000, their eighth straight monthly decline. Of 84 manufacturing industries, 42.9% were hiring in February, unchanged from January.

According to the payroll survey of 400,000 business establishments, private-sector payrolls rose by 58,000, matching the 57,000 estimated by the ADP national employment report Wednesday. See full story. It's the weakest private-sector growth since late 2004.

Of 278 industries, 63.5% were hiring in February, the lowest percentage since December 2005.

Service-producing industries added 168,000 jobs, with stronger growth seen in health care, professional services, and leisure and hospitality industries. Temporary-help jobs fell by 12,000.

In a separate report, the Commerce Department said the U.S. trade gap narrowed to $59.1 billion in January as exports climbed to a new record and imports fell slightly. See full story.

Rex Nutting is Washington bureau chief of MarketWatch.