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Jobs Growth Is Slightly Soft

Updated from 10:36 a.m. EST

Another month, another mediocre jobs report.

The U.S. economy added 157,000 jobs in December, below the 175,000 consensus estimate and barely enough to keep up with the natural growth in the labor force. More troubling perhaps, average hourly earnings rose a meager 0.1%, below economists' 0.2% target.

After the minutes of the Federal Reserve's policy meeting were released earlier this week, some investors worried that the central bank might abandon its "measured" approach and raise interest rates more aggressively.

Fed members said the economic expansion is now "more firmly entrenched," and that cost and price pressures could become a problem without further tightening. The Fed raised rates five times last year in increments of 25 basis points. Still, economists said the sluggish wage gains in December should assuage fears about rising inflation.

"Moderate gains in hiring, moderate wages, and a steady unemployment rate this month argue against a more aggressive timetable from the Fed just yet," said Steven Wieting, senior economist at Smith Barney.

Stocks were slightly higher in morning trade, with the Dow up 3 points at 10,626 and the Nasdaq up by 1 at 2,091. Long term bonds were also in positive turf, with the yield on the 10-year Treasury note falling to 4.26%.

Ian Shepherdson, chief economist at High Frequency Economics, noted that last month's employment data were actually boosted by favorable seasonal adjustments and by gains at the state and local government level.

"Core job gains are softer than [the] headlines and wage gains are still worryingly soft," he said.

Private payrolls actually advanced just 128,000 last month, as the government added 29,000 jobs. In the manufacturing sector, just 3,000 positions were added while healthcare and education added 47,000. The retail industry shed almost 20,000 jobs.

In the household survey, a smaller sample of employment that gained popularity among some economists during the election, unemployment grew by 27,000 and employment fell by 137,000. The household survey covers 60,000 homes while 400,000 businesses are sampled in the payroll survey.

Although the unemployment rate held steady at 5.4% in December, this was largely due to 110,000 workers dropping out of the labor force.

It wasn't all bad news, however. Payrolls for October and November were revised up by a combined 34,000. In addition, the average workweek rose a tenth of an hour to 33.8 hours. The total number of hours worked in the economy grew by 0.4%.

For all of 2004, the economy added 2.2 million jobs, its best gain since 1999, but only slightly ahead of underlying growth in the labor force. The unemployment rate fell from 5.7%.

Eric Goodstadt, chief marketing officer at staffing firm Management Recruiters International, believes that companies were distracted from hiring in December as they struggled to comply with provisions in the Sarbanes-Oxley corporate reform law.

"We're seeing trends that are indicating we should see substantial growth in January and February," he said, adding that he expects job growth of around 200,000 per month over the next four months.

Sherry Cooper, chief economist at BMO Nesbitt Burns, also thinks the job market is poised to improve, pointing to an increase in the Manpower index of hiring intentions and rise in the NFIB's small business index.

Still, some economists note that Conference Board's help-wanted index dipped a point in November. This measure has historically been a good indicator of labor demand with a lag of one or two months.

"Job growth remains positive, but still stubbornly sluggish," said Bill Cheney, chief economist at John Hancock Financial Services. "I see moderate job growth in the year ahead [and] I don't expect a breakout of labor cost inflation any time soon."

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