US economy boosted as jobless rate drops to 18-month low

The US economy created far fewer jobs than expected in December, but revisions meant the unemployment rate dropped to its lowest in more than 18 months.

Non-farm payrolls increased 103,000, the Labor Department said on Friday, below economists' expectations for 175,000. Private hiring rose 113,000, while government employment fell 10,000.

However, overall employment for October and November was revised to show 70,000 more job gains than previously reported, meaning the December unemployment rate fell to 9.4pc, the lowest since May 2009, from 9.8pc in November.

Economists raised their employment forecasts after payrolls processing company ADP Employer Services said on Wednesday private employers added 297,000 in December – the largest gain on ADP records dating to 2000.

"The labour market improvement is still way slower than what everybody would hope for," Harm Bandholz, chief US economist at UniCredit Research in New York told Reuters.

Federal Reserve officials will weigh the jobs report when they meet on January 25-26.

Signs of strength in the economic recovery had led to calls for the US central bank to scale back its widely criticised $600bn government bond-purchasing program aimed at keeping interest rates low to boost demand.

Some policymakers indicated in December they had a "fairly high" threshold for curtailing the stimulus program.

Fed Chairman Ben Bernanke speaks on the economic outlook before the Senate Budget Committee at 2.30pm.

Analysts say the Fed's focus is on unemployment and expect it to complete the bond-buying plan.

"Gains in payrolls won't be enough to spark a change in Fed policy until the gains either accumulate for many, many months or are accompanied by gains in inflation expectations," Tony Crescenzi, a strategist at bond fund PIMCO, told Reuters.

The economy usually needs to create at least 125,000 jobs a month to keep the unemployment rate from rising, but a faster pace might be needed now since so many discouraged workers are sitting on the sidelines. As job growth picks up, these workers could re-enter the labour force, keeping upward pressure on the jobless rate.

Employment gains in December were led by the private services sector, which saw payrolls rising 115,000 after gaining 84,000 in November. Retail jobs increased 12,000 after a surprise 19,400 slump in November when retailers reported their best sales in years.

Temporary hiring, seen as a harbinger of permanent employment, increased 15,900 after 31,100 in November.

The goods-producing sector shed 2,000 jobs in December after losing 5,000 in November, but manufacturing payrolls rose 10,000. Construction employment fell 16,000 after slipping 2,000 in November.

The average work week was steady at 34.3 hours. Average hourly earnings increased three cents in December.