Surprisingly strong jobs growth dashes some fears the U.S. is heading toward recession and leaves the Federal Reserve on track to raise interest rates — barring a global financial meltdown.
The 292,000 jobs created in December was a surprise to economists who were expecting closer to 200,000 nonfarm payrolls. The unemployment rate was unchanged at 5 percent, as expected, but average hourly wages were flat when economists expected a pickup of 0.2 percent.
"It's a report that says to the market, if you're worried about a recession, that's ridiculous. If you're worried about the Fed, there's nothing to worry about. It's the best of both worlds for the markets and the Fed," said John Canally, economist and market strategist at LPL Financial.
While economists see soft U.S. growth at an average 1.3 percent for the fourth quarter, they see a return to growth of above 2 percent in the first quarter. Manufacturing has been a soft spot and ISM surveys show that it is in contraction.
Barclays said fourth quarter GDP was tracking at just 0.7 percent, after November wholesale inventories later Friday showed a drop of 0.3 percent and October was revised to reflect the same decline.
Canally said the lack of wage growth means the Fed won't be pressed to hike rates more quickly for fear of inflation. Average hourly earnings for all private sector employees fell by 1 cent to $25.24, after rising 5 cents in November. Wages are up 2.5 percent over the year, but last December's wages were particularly weak.
With the market meltdown this week, traders put U.S. recession on their list of worries. Global markets were jittery about weakness in China, as investors feared its currency decline would slow the Chinese economy further and spill into the world economy.
"I could not imagine a better report from the Fed's point of view," said Marc Chandler, chief currency strategist at Brown Brothers Harriman. "I can't think of one time when the U.S. had a recession with this kind of jobs growth."
Stock futures were higher ahead of the jobs report, but rose further on the strong number. Treasury yields edged higher, with the 2-year yield moving back toward 1 percent.
The dollar rallied against the major currencies, and the euro slipped as markets moved to "risk on."
Market expectations for the fed funds target rate also adjusted higher, after declining this week on speculation that the Fed would stay on hold because of chaos in global markets and tightening financial conditions.
As it stands, the Fed is forecasting four rate hikes, which many economists see as too aggressive. This week, Fed Vice Chairman Stanley Fischer reconfirmed the Fed would still like to raise rates, even as global markets were rocked and the S&P 500 plunged 5 percent.
The market is now pricing in one full rate hike in the fed funds target rate, and a 90 percent chance for a second one this year, according to RBS. The odds for a second rate hike had moved to 70 percent this week as China spooked markets and raised speculation it would create financial conditions that would cause the Fed to slow down.
Hiring clearly may have benefited from some weather effects. Construction jobs were strong for a third month, gaining 45,000 in December. Areas of strength included professional and business services, up 73,000.
Manufacturing showed little change though nondurable goods added 14,000 jobs. In 2015, manufacturing lost 30,000 jobs in 2015 after gaining 215,000 in 2014.
Transportation and warehousing jobs increased by 23,000, with a gain of 15,000 couriers and messengers. To economists, that indicates a shift from traditional retail jobs in physical stores to online retail.
A weak spot in the economy was mining, which includes energy jobs. That sector declined 8,000 jobs.