By Lucia Mutikani
WASHINGTON (Reuters) - U.S. job growth slowed more than expected in December amid a decline in retail employment, but a pick-up in monthly wage gains pointed to labor market strength that could pave the way for the Federal Reserve to increase interest rates in March.
Nonfarm payrolls increased by 148,000 jobs last month, the Labor Department said on Friday. Retail payrolls fell by 20,300 in December, the largest drop since March, despite a strong holiday shopping season.
Employment data for October and November data were revised to show 9,000 fewer jobs created than previously reported.
Job growth surged in October and November after being held back in September by back-to-back hurricanes, which destroyed infrastructure and homes and temporarily dislocated some workers in Texas and Florida.
Average hourly earnings rose 9 cents, or 0.3 percent, in December after gaining 0.1 percent in the prior month. That lifted the annual increase in wages to 2.5 percent from 2.4 percent in November. The unemployment rate was unchanged at a 17-year low of 4.1 percent.
Job growth is slowing as the labor market nears full employment. It could get a boost from a $1.5 trillion package of tax cuts passed by the Republican-controlled U.S. Congress and signed into law by President Donald Trump last month.
But the lift from the fiscal stimulus, which includes a sharp reduction in the corporate income tax rate to 21 percent from 35 percent, is likely to be modest as the stimulus is occurring with the economy operating almost at capacity. There are concerns the economy could overheat.
"With the tax cuts we get solid GDP growth in the near-term and then a fiscal hangover, which will likely put the economy at a greater risk of recession," said Ryan Sweet, senior economist at Moody's Analytics in West Chester, Pennsylvania.
JOB GROWTH SEEN SLOWING
For all of 2017, the economy created 2.1 million jobs, below the 2.2 million added in 2016. Economists expect job growth to slow this year as the labor market hits full employment, which will likely boost wage growth as employers compete for workers.
The economy needs to create 75,000 to 100,000 jobs per month to keep up with growth in the working-age population. Economists are optimistic that annual wage growth will top 3.0 percent by the end of this year. The December employment report incorporated annual revisions to the seasonally adjusted household survey data going back five years.
There was no change in the unemployment rate, which declined by seven-tenths of a percentage point last year.
Economists believe the jobless rate could drop to 3.5 percent by the end of this year. That could potentially unleash a faster pace of wage growth and translate into a much stronger increase in inflation than currently anticipated.
That, according to economists, would force the Fed to push through four interest rate increases this year instead of the three it has penciled in. The U.S. central bank raised borrowing costs three times in 2017.
"If the unemployment rate declines and wages rise faster, which is likely, the Fed is going to start worrying about wage inflation," said Joel Naroff, chief economist at Naroff Economic Advisors in Holland, Pennsylvania.
Employment gains were broad in December, mirroring the pattern of the previous two months.
Construction payrolls increased by 30,000 jobs in December, the most since February, reflecting recent strong increases in homebuilding. Manufacturing employment increased by 25,000 jobs.
Department store payrolls fell by 8,200 in December and employment at clothing stores dropped by 3,800. Macy's Inc M.N said last month it would hire an additional 7,000 temporary workers for its stores to deal with heavy customer traffic in the run-up to the holiday shopping season.
(Reporting by Lucia Mutikani; Editing by Paul Simao)