Unemployment rate falls to 8.5%, lowest in nearly 3 years

The long-struggling economy is picking up a head of steam, with government data showing the unemployment rate dropping to a nearly three-year low in December as businesses in a wide range of industries created a solid batch of new jobs.

The strengthening labor market could bolster consumer income and confidence, giving a lift to spending and economic growth. That, in turn, could lead more businesses to step up hiring.

The jobless rate edged down to 8.5% from a revised 8.7% in November, continuing a steady decline from 9.1% in August, the government said.

With manufacturers growing and small businesses seeing signs of life, employers added 200,000 net jobs in December — double the number in November. Hours worked in the private sector ticked higher, and average hourly earnings rose slightly.

The report, along with increases in car sales and new-home construction and other positive signs, point to an economy that entered the new year with some momentum.

Nevertheless, formidable challenges remain, including the European debt crisis and severe budget constraints at state and local governments.

"I'm not banking on this to represent a new trend yet, but this does feel good," said Heidi Shierholz, a labor economist at the Economic Policy Institute in Washington.

December's better-than-expected performance was good news for President Obama, who is hoping a reinvigorated economy will buoy his reelection prospects. In touting Friday's report, the president noted that more private-sector jobs were created last year — nearly 2 million — than in any year since 2005.

At the same time, he tried not to be overly exuberant, mindful that millions of Americans remain out of work.

"A lot of families are still having a tough time. A lot of small businesses are still having a tough time," he said in an appearance at the new Consumer Financial Protection Bureau. "But we're starting to rebound. We're moving in the right direction. We have made real progress. Now is not the time to stop."

The economy still has 6 million fewer jobs than in December 2007, when the recession started and the jobless rate was 5%.

In the 2 1/2 years since the recession technically ended, the economy and the job market have occasionally perked up, only to lapse back into lackluster growth. That occurred most recently last summer when the debt-ceiling fiasco and shocks from problems overseas shattered business and consumer confidence.

Even as some of the Republican presidential candidates acknowledged that Friday's report was positive, they attacked Obama's handling of the economy.

"Thirty-five consecutive months of unemployment above 8% is no cause for celebration," said Mitt Romney, who narrowly won the Iowa caucuses this week. Newt Gingrich called the job-growth numbers "anemic."

Administration officials wouldn't predict whether the economy's momentum would last. Instead, Labor Secretary Hilda Solis and Alan Krueger, Obama's chief economic advisor, argued for extension for the rest of the year of the payroll tax cut and federal unemployment benefits, set to expire at the end of February.

Experts said the recent pick-up in hiring is coming partly from an increase in the number of start-ups and from relatively young companies, which historically have been primary sources of new jobs.

"In some cases, it's driven by necessity," said Tom Still, president of the Wisconsin Technology Council, a nonprofit group that assists and monitors start-ups.

He said so-called angel funding — venture capital for start-ups — was up sharply in his state, as was other support for entrepreneurs.

"The process of industries shedding jobs may have bottomed out to the point where there's no place to go but up," he said.

That's how Raymond Gaster, the owner of Gaster Lumber & Hardware in Savannah, Ga., might look at things.

"We're spread pretty thin," said Gaster, 69. "We don't have people to shift around."

He recently hired a couple of workers after one employee retired and another left for a different job. But his workforce remains at 29, down from 85 before the recession, and his employees have taken at least one pay cut.

"Things are getting better, but our plans are not to add until we see a definite increase in business," he said.

As with Gaster's recent hiring, the latest jobs report doesn't look as strong beneath the surface.

"If you look beyond the top-line numbers and into the details, fundamentally we are still pretty weak," said Perry Wong, chief economist at City National Bank in Los Angeles, pointing to the long-term unemployed. "To step out of the woods and get high growth, you need to add jobs north of 200,000 — and consistently."

Although Friday's report doesn't break down figures by state, analysts figure that California probably got at least its share of the jobs added in December. In part, that's because the national numbers for manufacturing, a big industry for the state, were strong, Wong said.

Moreover, California's large population means it probably picked up a good chunk of the healthcare gains, and the motion picture business, centered in Los Angeles, showed solid gains nationally as well, he said.

Analysts attributed part of the nation's steady drop in the jobless rate since summer to people dropping out of the tough job market.

There were other caveats too. Although the data are seasonally adjusted, there was an unusual increase of 42,000 messengers and couriers last month, a figure that probably was bolstered by the growing strength of Internet sellers and holiday deliveries.

Retailers added a larger-than-expected 28,000 positions after fattening their payrolls by 39,000 in November. It remains to be seen how many of these positions will last beyond the holidays.

The unusually warm December boosted construction payrolls. And hiring at bars and restaurants was helped by cash-rich companies that "ramped up their holiday parties and entertaining after a hiatus in the wake of the financial crisis," said Diane Swonk, chief economist at Mesirow Financial in Chicago.

Even so, hiring at financial services firms was dormant. The temporary-help industry cut 7,500 jobs in December. Government shed 12,000 from its payrolls — all at public schools and other local agencies.

For all of last year, the economy created about 1.6 million net jobs, up from 940,000 added to payrolls in 2010. More than 13 million people were jobless and seeking work last month — 42.5% of them for longer than six months — and an additional 8.1 million part-time workers said they could not get full-time hours.

don.lee@latimes.com

Times staff writer Jim Puzzanghera in Washington contributed to this report.

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