U.S. unemployment falls to 5.6%, payrolls rise solidly

U.S. job growth increased briskly in December, positioning the economy for a sturdy pace of expansion this year and keeping the Federal Reserve on course to start raising interest rates.

Nonfarm payrolls increased 252,000 last month after an upwardly revised 353,000 jump in November, the Labor Department said on Friday.

The unemployment rate fell 0.2 percentage point to a 6-1/2-year low of 5.6%, in part as people left the labor force.

But a five cent drop in average hourly earnings after rising six cents in November, took some shine off the report.

"This is probably a good enough number to allow the Fed to stay on course in terms of adjusting policy, but it probably won't cause them to change their timing from mid-year," said Peter Cecchini, managing director and chief market strategist at Cantor Fitzgerald in New York.

U.S. stock index futures erased losses after the report, while the dollar rose. Prices for U.S. Treasury debt were trading higher.

December marked the 11th straight month of payroll increases above 200,000, the longest stretch since 1994. With October's count also revised higher, the economy created 50,000 more jobs than previously reported in the prior two months.

But weak wage growth could see the Fed cautious about raising interest rates too soon. The U.S. central bank has kept its short-term interest rate near zero since December 2008.

It has not raised interest rates since 2006, but recently signaled it was moving closer to hiking, even if inflation remains below the Fed's 2.0% target. Most economists expect the first rate increase in June.

An acceleration in wage gains is in the cards as the labor market continues to tighten. That, together with lower gasoline prices are expected to provide a tail wind to consumer spending this year.

"The wage story should look much better at the end of 2015 than it does here," said Dan Greenhaus, chief strategist at BTIG in New York.

Economists polled by Reuters had expected employment to increase 240,000 in December and the unemployment rate to fall one-tenth of a percentage point to 5.7%.

The sturdy job gains added to robust third-quarter growth data, as well as solid November industrial production and retail sales reports, in suggesting the economy would weather turbulence in Europe, Japan, China and some emerging markets.

The bigger survey of employers showed job gains in 2014 were the largest since 1999.

The smaller household survey data from which the unemployment rate is derived was revised back five years. The revisions showed no material shift in the trend.

The unemployment rate dropped 1.1 percentage points in 2014, while the number of Americans out of work decreased by 1.7 million. Almost two-thirds of the decline in the level of unemployment last year was among the long-term unemployed.

Most of the measures tracked by Fed Chair Janet Yellen to gauge the amount of slack in the labor market continued to point to tightening conditions in December.

A broad measure of joblessness that includes people who want to work but have given up searching and those working part-time because they cannot find full-time employment, fell two-tenths of a percentage point to 11.2%, the lowest since September 2008.

The ranks of the long-term unemployed continued to shrink in December. But the labor force participation rate fell to 62.7% from 62.9% in November.

Job gains in December were dispersed across all sectors. Private payrolls rose 240,000, with construction employment up 48,000, the largest rise since January. Manufacturing payrolls rose 17,000.

Government employment increased 12,000 last month. The average work week was steady at a 6-1/2-year high of 34.6 hours.