April 1 (Bloomberg) -- The U.S. unemployment rate unexpectedly dropped to a two-year low of 8.8 percent in March as employers created more jobs than forecast, adding to evidence of a recovery in the labor market.
Payrolls rose by 216,000 workers last month after a 194,000 gain the prior month, the Labor Department said today in Washington. Economists projected a March increase of 190,000, according to the median estimate in a Bloomberg News survey. A separate report today showed U.S. manufacturing expanded at close to the fastest pace in seven years.
Stocks climbed as the figures showed the world’s largest economy is weathering the highest energy prices in more than two years. Treasuries pared losses after William Dudley, president of the Federal Reserve Bank of New York, said the jobs data shouldn’t change the central bank’s plans to buy $600 billion of government securities through June.
“We have sustained economic growth in the U.S.,” said John Silvia, chief economist at Wells Fargo Securities LLC in Charlotte, North Carolina, who projected payrolls would climb by 220,000. Even so, “Removing stimulus isn’t in the cards at all any time soon.”
The Standard & Poor’s 500 Index gained 0.7 percent to 1,335.4 at 1.08 p.m. in New York. The yield on the 10-year note fell to 3.46 percent after rising as high as 3.52 percent after the jobs report. The yield was 3.47 percent yesterday.
“I don’t see any reason to pull back from that yet,” Dudley said in response to reporters’ questions about the Fed’s bond-buying program after a speech in San Juan, Puerto Rico. In his speech, he said the recovery is “still tenuous” and “far from the mark” of the central bank’s goals of full employment.
Payroll estimates in the Bloomberg survey of 83 economists ranged from gains of 150,000 to 295,000. The unemployment rate was projected to hold at 8.9 percent, according to the survey median.
Manufacturing expanded in March at about the same pace as February, the strongest month since May 2004. The Tempe, Arizona-based Institute for Supply Management said its manufacturing index was 61.2 compared with 61.4 in February. Readings greater than 50 signal expansion. The median forecast of 79 economists surveyed by Bloomberg was 61.1.
While companies stepped up hiring, earnings and hours stagnated, the Labor Department’s figures showed. Average hourly earnings for production workers rose 0.8 percent over the past six months, the smallest gain for such a period since 2004. The increase for all workers was 0.7 percent, the weakest since records began in 2006. Labor expenses account for about 60 percent of the cost of making a good or providing a service.
“In conjunction with the increased pace of hiring, this suggests that increasing numbers of returning jobless workers may be settling for lower wages than they had earned before the recession,” David Resler, chief economist at Nomura Securities International Inc. in New York, said in a note to clients. “The softness in this proxy for wages underscores our contention that the core inflation is not likely to accelerate much.”
Bill Gross, manager of the world’s biggest bond fund at Pacific Investment Management Co., said the gain in employment suggests the Fed’s bond purchases have been effective.
“Their objective obviously is to improve the economy and to create jobs but also to put a floor under the stock market, and we know that’s working,” Gross said in a radio interview on “Bloomberg Surveillance” with Tom Keene. “The question remains, when the Fed stops buying Treasuries, does the private sector take the baton and run the last leg of the relay race? We have doubts as to whether that remains the case.”
The Fed, after its latest policy meeting March 15, pledged to continue its bond-purchase program in order to “promote a stronger pace of economic recovery.” Policy makers said the economy is on a “firmer footing” while acknowledging a rise in commodity prices.
Record exports and gains in business and consumer spending are prompting companies like Chrysler Group LLC and Kohl’s Corp. to boost staff. Other manufacturing reports today showed China’s factories accelerated for the first time in four months, while India’s grew for a 24th month. Russia’s factory output increased to the highest in almost five years, and a gauge of manufacturing in the euro region declined.
Chrysler, aiming for its first net profit since emerging from bankruptcy in 2009, plans to hire 1,000 engineers and high-tech workers for its small and midsized vehicles. The Auburn Hills, Michigan-based company is also urging its dealers to hire more salesmen and service workers to help boost sales by 32 percent this year.
“Hiring additional personnel in preparation for the spring market is essential for success in 2011,” Peter Grady, vice president of Chrysler’s network development and fleet, said in a memo to dealers last month.
Kohl’s said this week that it plans to open a new e-commerce distribution center in Edgewood, Maryland, in July and hire 1,200 workers over the next three years.
Private hiring, which excludes government agencies, rose by 230,000 in March, more than the median 206,000 median forecast in the Bloomberg survey, after a 240,000 increase in February. The back-to-back gain was the biggest since February-March 2006.
The separate survey of households showed the size of the labor force increased by 160,000 in March and employment grew by 291,000. That pushed the share of the population that is employed up to 58.5 percent from 58.4 percent a month earlier.
Government payrolls decreased for a fifth straight month in March, reflecting cuts at the local level. Factory payrolls increased by 17,000 last month, while the construction industry shed jobs.
Employment at service-providers rose 185,000 in March, the most since May 2010. Temporary-help services companies added 28,800 workers, while retail employment increased 17,700.
Economic growth accelerated to a 3.1 percent annual rate in the fourth quarter of 2010 as consumer spending climbed by the most in four years.
Oil prices that closed at $106.72 yesterday, the highest since September 2008, may keep climbing should Middle East political turmoil continue unabated, raising the risk that consumer spending will slow.
U.S. companies are still trying to gauge the effects of the March 11 earthquake in Japan and the subsequent nuclear crisis on international supply chains. Toyota Motor Corp. expects assembly interruptions that may affect North America plants.
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