Update: Unemployment Rate Dips as Wages Climb

(Updated from 11:03 a.m. EDT)

The nation's unemployment rate ticked lower, to 4%, in June, and wages continued to rise. But the economy generated a surprisingly small number of jobs in June, as temporary census workers left the government's payrolls.

Still, the June employment report released Friday suggested that labor markets remained strong even though higher interest rates are beginning to slow down parts of the economy.

Nonfarm payrolls, a broad measure of the overall pace of job creation, rose just 11,000 in June, in sharp contrast to the revised 171,000 pace in May and the 410,000 pace in April, the Labor Department said Friday. That is the slowest rate of hiring since early 1996.

But despite the slower rate of hiring, the unemployment rate dipped to 4% from 4.1% in May, keeping the measure of available workers near its 30-year low of 3.9%, hit in April. The scarcity of available workers enabled them to demand more money. Average hourly earnings for U.S. workers rose 5 cents, or 0.4%, to $13.71 after rising 0.1% in May.

The slow growth in June's payrolls came as a surprise to economists, who had been expecting a 243,000 increase, according to a consensus poll by Reuters. Although the slower pace of June hiring on its own is unlikely to ease the concerns of Federal Reserve policymakers, who fear that strong labor markets are heightening the risk of inflation, it adds to a string of other data indicating that key sectors of the economy are indeed slowing.

A 195,000 drop in government hiring, largely related to the disappearance of temporary census jobs, helped to offset stronger private-sector hiring, which rose 206,000. The June gain in private-sector payrolls is only slightly lower than the average pace of private-sector job growth over the 12 months ended in April -- 215,000. But the average pace has dropped to 191,000 in June.

The pace of private sector hiring remains a sign that labor markets will continue to propel the broader economy, said Joe LaVorgna, senior U.S. economist at Deutsche Bank. "The underbelly of this report confirms and points to strong economic growth," he added.

Within the private sector, manufacturers increased payrolls by 8,000 after cutting back 1,000 in May. Service sector payrolls grew by 148,000, which included 49,000 new retail jobs, after rising 17,000 in May.

The still-high rate of private sector job creation could cause skepticism about recent talk of an economic slowdown. Some measures of the economy, such as a May rebound in factory orders and the continued upward momentum in hourly earnings and personal income, are likely to continue worrying policymakers, even though other areas of the economy such as retailer sales, home sales and consumer confidence have taken a dive in recent months.

The mixed bag of strength in some sectors of the economy and weakness in others are causing mixed opinions among economists about just how much the Fed's efforts to raise interest rates are slowing U.S. economic growth. In theory, higher interest rates slow demand by making it more costly for consumers and businesses to borrow and spend, decreasing the risk of inflation.

The Fed has raised rates six times in the past year, but held rates steady at its most recent meeting on June 28, citing "tentative and preliminary" signs of an economic slowdown. But many economists expect that the Fed will continue to raise rates when it meets next in August, saying that economic growth still appears to be well above the historical trend.

"As appealing as these numbers are, they do little to clear the murkiness," said Oscar Gonzalez, economist at John Hancock Financial Services. "The most we can now conclude is that six rate hikes are slowing the economy. It's still too early to declare we have achieved a level of stability that would comfort the Fed."