Payroll Growth Takes Hit

The economy produced 138,000 nonfarm jobs last month.
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Updated from 9:08 a.m. EDT

Growth in the U.S. labor market downshifted last month, with the economy producing a weaker-than-expected 138,000 nonfarm jobs. While wage growth was brisk, the report is likely to contribute to hopes that the

Federal Reserve

can afford to pause its two-year-old rate-tightening campaign.

According to the Labor Department, the unemployment rate held steady at 4.7% in April, while average hourly earnings rose 0.5%. On average, economists were forecasting 205,000 new jobs, an unemployment rate of 4.7% and average hourly earnings growth of 0.3%.

"In an inflationary sense, traders will have to decide if the wage number is more important than the jobs-created number," said Jay Suskind, head of institutional equity trading at Ryan Beck & Co. "Perhaps now, Bernanke can suggest a pause again. That possibility is back into the equation."

The gain in February and March payrolls was downwardly revised by 36,000 jobs.

Among sectors, manufacturing added 19,000 jobs last month, while health care added 23,000. Overall, the services sector of the economy produced 101,000 jobs, down significantly from previous months. Retailers cut 34,000 jobs in April.

Stocks rallied on the report, which showed the weakest monthly jobs addition since October and the strongest wage growth in five years. The

Dow Jones Industrial Average

rose 68 points, or 0.6%, to 11,507. The yield on the 10-year Treasury bond went from 5.16% to 5.11%.

"The report in itself showed jobs growth is much less robust, lessening concerns that the jobs market is overheating," said Peter Cardillo, chief market analyst with S.W. Bach & Co. "All in all, this will feed the bulls."

It has been a busy period for traders trying to get a handle on how many more times the Fed plans to raise rates. Testimony last week from Chairman Ben Bernanke raised the possibility of a near-term pause, especially if incoming data suggest the economy is slowing.

On Monday, however, a report suggested that Bernanke overstated his case last week and remained committed to a purely "data-dependent" policy on future hikes. The Federal Open Market Committee has raised the fed funds rate by a quarter point in 15 straight meetings, pushing it to 4.75% on March 28.

Interest-rate futures currently price in a 100% probability the FOMC will boost fed funds to 5% when it convenes next Tuesday in Washington. Less certainty surrounds the panel's June 28 and 29 meeting; interest rate futures were pricing in a 44% likelihood of a hike before Friday's jobs numbers hit and a 30% likelihood afterward.

Along with energy prices, the rate of employment growth is one of the key pieces of the Fed's puzzle. In its last statement in March, policymakers noted that labor costs were being held in check by productivity growth, but that "increases in resource utilization" had the potential to drive inflation.

On Thursday, the Labor Department said worker productivity rose by an annualized 3.2% in the first quarter, reversing a revised 0.3% contraction in the previous three months. The report also showed that hourly wages rose 5.7% last quarter, stronger than expected.

To view Lauren Silva's video take of this story, click here

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