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Jobs Growth Slows Down

Updated from 8:40 a.m. EST

The U.S. labor market hit a speed bump in December as retailers and builders added fewer jobs than economists predicted. The government's monthly employment report also showed sharper-than-expected growth in labor costs.

Nonfarm employers added 108,000 jobs last month, below Wall Street's expectations for 200,000 new jobs. The unemployment rate fell one-tenth of a percent to 4.9%, while average hourly wages rose 0.3%.

The payroll shortfall was largely offset by a 71,000-job upward revision to the number of jobs created in October and November. Economists had been expecting an unemployment rate of 5% and wage growth of 0.2%.

Labor growth was weak in two sectors where seasonal adjustments can skew performance: construction and retail services. Those industries lost a combined 24,000 jobs last month as cold weather blanketed much of the country.

The manufacturing sector added 18,000 jobs, while service-producing industries added a combined 96,000 jobs. Business and professional services added 33,000 jobs while education and health employers added 25,000 jobs.

Taken as a whole, the report's implications for interest rate policy is neutral, as the lackluster jobs growth is offset by the jump in wage costs. Heading into the report, some investors worried that too-strong of a payroll number would dash hopes for an imminent end to the Fed's current rate tightening campaign.

Fed policymakers last month boosted official interest rates for the 13th consecutive time, to 4.25%, but used rhetorical semiotics to suggest they plan roughly two more rate hikes in the current cycle. Heading into Friday, fed funds futures put the odds at 88% that the central bank will raise rates to 4.5% on Jan. 31. They put 48% odds on another hike, to 4.75%, on March 28.

After the data hit, the odds moved to 90% for January and 50% for March. The odds for another hike after that went from next-to-nothing to nothing, according to Miller Tabak.

On Friday, stocks welcomed the lukewarm jobs report, with futures on the S&P 500 going from flat to up 8 points in the aftermath of the data, while the Nasdaq 100 was indicated 12 points higher. The yield on the 10-year bond went from 4.36% to 4.38%.

For all of 2005, the U.S. economy created 2.02 million jobs. It added 2.19 million in 2004.

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