Payrolls up only 18,000 in December; jobless rate at 5%

WASHINGTON -- Hiring stalled in December as the nation's employers created a net 18,000 jobs and the unemployment rate jumped to 5% — highest level in two years, the Labor Department said Friday.

The dismal jobs report raised the specter of slower consumer spending and renewed fears of a recession, strengthening the case for the Federal Reserve to cut interest rates to stimulate the economy when it meets later this month .

Factories, construction firms and retailers shed workers during December, in part reflecting the deepening depression in the housing sector. The number of Americans without a job jumped 474,000 last month, to 7.7 million, pushing the unemployment rate from 4.7% to 5.0%.

By comparison, the number of unemployed workers in December 2006 stood at 6.8 million, and the jobless rate at 4.4%. Overall, employers created 1.3 million jobs in 2007, compared with 2.3 million in 2006. That's the slowest pace of job creation in four years.

For all 2007, the unemployment rate averaged 4.6%, same as last year.

December's 5% unemployment rate is relatively low by historical standards. In the recession of the early 1980s, for example, the jobless rate reached double digits.

Nevertheless, with the economy losing momentum, the White House and some economists at the Fed predict the jobless rate will average 4.9% this year.

Another report showed that the nation's service sector grew in December, but at a pace slightly slower than the month before.

The Institute for Supply Management said Friday that its index measuring performance in non-manufacturing industries slipped to 53.9 in December from 54.1 in November. It was the lowest reading since 52.4 in March.

A reading above 50 indicates expansion, while one below 50 shows contraction.

The downbeat reports are the latest data – following contracting manufacturing numbers and spiking oil prices this week – that the U.S. economy is losing steam. It comes as President Bush meets today with top economic officials, including Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke, to discuss possible stimulus proposals to boost the economy.

The central bank has cut a key interest rate by a full percentage point to 4.25% since last fall, as rising foreclosures in the high-cost subprime sector of the mortgage market have exploded into a full-blown world-wide credit crunch that has choked economic activity.

"The subprime mortgage crisis is biting and the economy is headed south," says Peter Morici, professor at the University of Maryland business school "Slow jobs growth, along with the shortages of mortgage and business credit, declining home prices and residential construction, and falling industrial production, indicate the risk of a recession for 2008 is high."

Several economists, including Steven Wood of Insight Economics, predict the Fed might have to make an aggressive half-percentage point rate cut when it meets Jan. 29 and 30.

The Fed is in a tough situation because rocketing oil and commodity prices have raised the specter of higher inflation as the economy slows.

But Friday's employment report showed wage growth was moderate in December. That lessens inflation pressure but it means consumer spending, which accounts for two-third of the economy, is in danger of slowing and stifling growth.

"This morning's employment report coupled with Wednesday's dismal … manufacturing survey, which showed a contraction in manufacturing, leaves the door wide open for aggressive action by the Fed," Moody's Economy.com told clients in an advisory.

As has been the case for months, the goods-producing sector of the economy was hardest hit. Manufacturing employment dropped 31,000 during the month and construction payrolls were down 49,000. Retail employment was off 21,000 during the month as well.

Health care, food services and architectural and engineering continued to gain. Health care has been an important support, creating 381,000 jobs the past year. Overall, health care and food services firms made up about two-thirds of private sector job growth in 2007, the Labor Department said.

The deep housing slump has taken a toll, with construction employment off 236,000 the past year. Factory employment was down 212,000 in 2007.

Ian Shepherdson of High Frequency Economics noted that payrolls stayed in positive territory only because of public sector hiring, with private jobs falling by 13,000 – first such decline since July 2003.

Richard Yamarone, chief economist for Argus Research in New York, said the soft jobs numbers apparently reflect a "skittish" attitude among businesses about hiring when the economy's prospects are doubtful.

But he noted that harsh winter weather may also have played a role in the weaker-than-expected December jobs picture — "Most of the nation was iced over."