Unemployment Falls to 8.5%; 200,000 New Jobs Created

The U.S. unemployment rate unexpectedly fell to 8.5 percent last month as job creation was more robust than expected, providing continued signs that the nation's labor market is improving gradually.

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Growth in manufacturing jobs helped offset a loss in government positions, while wages edged higher and the length of the work week also lengthened a bit.

The unemployment rate — a hotly contested number because of the rise in potential workers who have quit looking for jobs — has fallen 0.6 percentage points since August.

However, an alternative measure of unemployment that counts discouraged workers also dropped sharply. The so-called U-6 number, more encompassing than the headline number the government publicizes, dropped to 15.2 percent from 15.6 percent in November.

"Overall the report was pretty solid through and through," said Brad Sorensen, director of market and sector analysis at Charles Schwab in San Francisco. "This helps to continue the snowball rolling downhill, as the more people hired and the more people working increases demand. Employers have to hire to meet that demand. It gets the ball rolling and we are starting to see a self-sustaining expansion phase take hold."

The labor-force participation rate, considered another key metric regarding optimism in the workforce, was unchanged at 64 percent. The average duration of unemployment remains near a record high at just under 41 weeks, though the number of those unemployed for 27 weeks or longer fell by 92,000.

Those not in the workforce at all finished 2011 at an annualized record high, but even that measure fell in December to 2.54 million, a drop of about half a million.

Job gains came from a variety of quarters: Transportation and warehousing surged by 50,000, the couriers and message industry rose 42,000, and retail added 28,000. Manufacturing grew by 23,000 and the hospitality industry continued its brisk pace, adding 24,000 jobs in December and 230,000 over the past year at food and drinking establishments.

"To be sure, manufacturing gains remain lackluster and gains in construction still await some awakening in the housing market," said Kathy Bostjancic, director of macroeconomic analysis at The Conference Board. "But there has been enough retail activity to allow the service-sector to show moderate and sustained job gains."

Economists had been looking for a number in the 175,000 range as both Wall Street and Main Street search for signs that the labor market is thawing. November saw a downwardly revised gain of 100,000 jobs and an unexpected fall in the unemployment rate from 9.0 percent to 8.7 percent.

Despite a steady progression in the amount of jobs created, the market has been reacting negatively on the first Friday of the month when the government's payroll count comes out. In fact, if the market closes lower Friday it will mark a new record of eight consecutive session in which the averages fell on the day of the monthly employment report.

Traders placed their hopes that today would be different after ADP and Macroeconomic Advisors reported Thursday that private payrolls grew by a stunning 325,000 last month. The government's report, though, showed private payroll gains at 212,000.

Stocks tumbled in the morning session, likely on the notion that traders already had been expecting a strong number — probably better even than economist estimates — and continue to be spooked by events in Europe.

"Overall, more encouraging economic news, but the headline payroll and unemployment figures perhaps overstate the strength of labor market conditions a little," Paul Ashworth, chief US economist at Capital Economics in London, said in a note. "We anticipate a more modest gain in employment this January."

Mild weather, for instance, helped give an unexpected boost to some areas. Just 127,000 people said they couldn't work because of the weather, compared to the seasonal norm of 192,000.

Temporary workers also dropped by 8,000 and the growth in couriers and messengers was seen as an aberration likely connected to a surge in online holiday sales.

The seasonal distortions, then, made the quarterly average — up to 152,000 in the fourth quarter from 126,000 in the preceding three months — more relevant, said Citigroup economist Steven Wieting.

"Warm and storm-free December weather may have helped some categories of employment marginally, and forward-looking developments could still stand in the way of maintaining the more vigorous employment gains," Wieting told clients. "However, today’s report is in line with other signs showing improved production and employment in the U.S. at year end."

The pressing question, then, after a positive four-month run in the market is sustainability. Expectations for today's report already had been strong, but the primary concern is whether the hirings were mostly seasonal and would fade once the economy gets back to tangling with the unresolved questions of European debt crisis contagion and the political stalemate in Washington.

Some economists warned that the steadying in markets came about because Europe's debt woes have faded from the headlines, a trend unlikely to last.

"With the boost from these temporary factors fading and concerns in Europe resurfacing, we expect the US economy to slow in the second half of the year," Neil Dutta, economist at Bank of America Merrill Lynch, said in a note. "Consider the stronger data we've seen a reversion to the mean as opposed to the start of a new trend."

The sustainability question figures significantly into President Obama's chances for re-election.

There are still 1.4 million fewer Americans employed from when the president took office in January 2009, a labor force participation rate at a record low and average unemployment duration double what it was then. The level of discouraged workers has surged 34 percent.

"Today’s report holds promise, but the dual realities of deeply entrenched long-term unemployment and job creation still heavily concentrated in lower-wage sectors like retail and food services threaten our ability to achieve the kind of economy we need,” Christine Owens, executive director of the National Employment Law Project, said in a statement.