WASHINGTON (Reuters) - U.S. employment recorded a second straight month of solid gains in March and the jobless rate fell to a two-year low of 8.8 percent, marking a decisive shift in the labor market that should help to underpin the economic recovery.
Nonfarm payrolls rose 216,000 last month, the largest increase since May, the Labor Department said on Friday. January and February employment figures were revised to show 7,000 more jobs than previously reported.
The strong job gains come amid indications the economy suffered a minor setback early in the year as bad weather and rising energy prices dampened activity.
"All the evidence is pointing to a strengthening labor market," said Bill Cheney, chief economist at John Hancock Financial Services in Boston.
While the report indicated sufficient underlying strength in the economy to cushion it against the impact of high energy prices, it was not strong enough to discourage the Federal Reserve from its ultra-easy monetary policies.
Policymakers at the U.S. central bank are, however, debating whether they should start considering withdrawing some of their massive economic stimulus.
The private sector accounted for all the new jobs in March, adding 230,000 positions after February's 240,000 increase. Government employment fell 14,000, declining for a fifth straight month as local governments let go 15,000 workers.
Although rising energy prices -- boosted by unrest in the Middle East and North Africa -- are eroding consumer confidence, economists do not expect businesses to put the brakes on hiring just yet.
"Employment gains have been modest in recent months, so in that sense I think businesses that were initially very wary of taking on permanent full-time employees are feeling more confident now than was case some months ago," said Richard DeKaser, an economist at Parthenon Group in Boston.
"As a result they are more willing to make those kinds of long-term commitments."
UNEMPLOYMENT RATE DIPS
The strengthening labor market tenor was also underscored by the unemployment rate, which dipped to 8.8 percent, the lowest since March 2009, from 8.9 percent in February.
The jobless rate, which is derived from a survey of households, has dropped 1.0 percentage point since November, mostly reflecting employment gains rather than a rise in the number of discouraged workers.
It could start rising as the improving employment picture coaxes those who have given up the search for work to re-enter the labor market.
"It is always possible that as the job market improves, people will start looking again and the unemployment rate could go up," said John Hancock's Cheney. "But the normal pattern is once it starts coming down as rapidly as it has over the last few months, it keeps on going down."
The jobless rate is one of the factors that could determine the timing of the Fed's first interest rate hike since it cut overnight lending rates to near zero in December 2008.
The central bank last month described the labor market as improving gradually and dropped a reference it had used in a statement in January to employers remaining reluctant to add to payrolls.
The economy has recovered a fraction of the more than 8 million jobs lost in the recession. Economists say job growth of between 250,000 and 300,000 a month is needed to have a sizable impact on the pool of 13.5 million unemployed Americans.
That will probably keep the Fed sidelined for a while.
"There still remains significant slack in the labor market," said Millan Mulraine, senior macro strategist at TD Securities in New York. "Given the high levels of unemployment and the fact that the duration of unemployment is still unacceptably high, the Fed will remain on the sidelines at least for the next year before they start contemplating tightening monetary policy explicitly."
The Fed is expected to complete its $600 billion government bond-buying program, which ends in June.
Employment in March was concentrated in the private services sector, which added 199,000 jobs. Payrolls in the goods-producing industries rose 31,000, but manufacturing employment growth slowed to 17,000 from 32,000 in February.
The construction industry dipped 1,000 after rising 37,000 in February.
The employment report also showed the average work week steady at 34.3 hours and average hourly earnings flat. (Reporting by Lucia Mutikani, Editing by Andrea Ricci)
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