Updated from 9 a.m. EST

Employment growth remains stubbornly stalled in the U.S., with the economy producing only 21,000 nonfarm jobs last month and far fewer than previously believed in December and January. The numbers sparked a major rally in bond markets.

The jobless rate held steady at 5.6% in February as the labor market's growth fell well short of economists' predictions for 130,000 new jobs. January's payroll additions were revised down by the Labor Department to 97,000 from 112,000, while December's were lowered to 8,000 from 16,000.

Friday's numbers raise difficult questions for U.S. financial markets, including concerns about the future of the current Republican administration and the impact on the Federal Reserve, which has recently hinted at rate tightening. The jobs picture remains anemic before a backdrop of growth in both profitability and worker output, trends that by themselves are positive for stocks.

Equity index futures tanked on the data but the major averages were in recovery mode at midday as prospects for a rate hike dimmed. The Dow was recently up about 2 points to 10,591, while the Nasdaq was above its session lows, though still down 7 points to 2048.

The 10-year Treasury note, however, added 1 8/32, pushing its yield down to 3.82% -- its lowest level since last July. The 30-year bond added more than 2 points in price to yield 4.72%.

Among sectors, only services registered an appreciable gain last month, adding 46,000 jobs. Manufacturing, which has seen a three-and-a-half-year job exodus, showed signs of leveling off, shedding only 3,000 jobs. The construction sector lost 24,000 jobs, while the leisure and entertainment industries gave up 9,000.

The U.S. economy is in some respects a victim of its own success. Productivity rose 4.4% in 2003 following a gain of 5% in 2002, as companies learned to produce more with fewer workers. Profits have risen following two years of brutal restructuring that have chased 1.7 million factory jobs out of the country since late 2001. A trend toward foreign outsourcing, which is shaping up as a major issue in the coming presidential election, exacerbated the problem.

The Labor Department said the average work week held steady at 33.8 hours in February, while average hourly earnings rose by 3 cents to $15.52, a trend that sometimes presages new hiring.

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