Job growth, hourly earnings jump in December

WASHINGTON (Reuters) - Job growth was surprisingly strong in December and pay jumped, according to a government report on Friday that may fan policy-makers' concern that a strong job market could ignite inflation.

The Labor Department said 167,000 jobs were created last month and also revised up hiring for each of the two preceding months. The unemployment rate in December was 4.5 percent, unchanged from November.

Wall Street economists had forecast that only 100,000 new jobs would be created in December, so the report painted a picture of a healthier job market and potentially stronger expansion than anticipated as 2006 ended.

A private-sector report earlier in the week had implied hiring would soften in December, so financial markets reacted sharply to Friday's higher-than-expected number.

Bond prices dropped as investors rated chances for lower interest rates anytime soon as fading, but the dollar's value rose against other currencies on signs of U.S. economic vigor.

Prices for bellwether 10-year U.S. Treasury notes fell 11/32 of a point to yield 4.65 percent while 30-year bonds were off 18/32 and were yielding 4.75 percent in late trading. Bond prices and yields move inversely.

Stock prices also fell sharply, partly because of reduced hopes for lower interest rates but also because of a disappointing forecast from Motorola Inc. which cast a shadow over high-tech shares.

The Dow Jones industrial average fell 82.68 points to finish at 12,398.01, while the high tech-laden Nasdaq composite index was down 19.18 points at 2,434.25.

A poll by Reuters of 21 primary dealers on Wall Street found 14 of them still think the next move by the Federal Reserve on interest rates will be to lower them, though the timing is uncertain given current signs of strength.

"The manufacturing side of the economy may be weak, but the rest of the economy is strong and that suggests that we're probably going to see continued good economic growth in the months ahead," said Gary Thayer, chief economist for A.G. Edwards and Sons Inc. in St. Louis.

STEADY INTEREST RATES

Thayer added that he expected the Federal Reserve to keep U.S. interest rates on hold "for the foreseeable future."