By Lucia Mutikani
WASHINGTON (Reuters) - U.S. job growth accelerated sharply in February despite the icy weather that gripped much of the nation, easing fears of an abrupt economic slowdown and keeping the Federal Reserve on track to continue reducing its monetary stimulus.
Employers added 175,000 jobs to their payrolls last month after creating 129,000 new positions in January, the Labor Department said on Friday. The unemployment rate, however, rose to 6.7 percent from a five-year low of 6.6 percent as Americans flooded into the labor market to search for work.
"It reinforces the case for the economy being stronger than it's looked for the last couple of months," said Bill Cheney, chief economist at John Hancock Financial Services in Boston. "It makes life easier for the Fed and feeds into continuing the tapering process."
The report also showed the largest increase in average hourly earnings in eight months and the payrolls count for December and January was revised up to show 25,000 more jobs created during those months than previously reported.
Investors on Wall Street cheered the report. U.S. stocks ended mostly higher, with the Standard & Poor's 500 index closing at a record. The dollar bounced off a four-month low, while prices for U.S. Treasury debt fell, with the yield on the benchmark 10-year note hitting a six-week high.
Interest rate futures showed that traders ramped up bets on the Fed raising rates a bit sooner than had been previously thought. They now point to a 54 percent probability of a rate hike in June 2015.
Unusually cold and snowy weather has disrupted activity in much of the United States for months, and a few economists had begun to speculate that the U.S. central bank could reconsider its plan to wind down its bond-buying stimulus.
The eastern and central United States experienced record low temperatures last month, and ice and snow blanketed densely populated areas during the week employers were surveyed for February payrolls. The winter storms left Wall Street bracing for a much weaker report. Economists had forecast nonfarm payrolls rising by only 149,000 jobs.
The weather, however, did have an impact. It cut into the length of the average workweek, which hit its lowest level since January 2011 and led to a drop in a measure of total work effort. But economists expect a reversal as soon as this month.
"The economy will defrost in the spring and heat up in the summer," said Michelle Meyer, a senior economist at Bank of America Merrill Lynch in New York. "We should see solid gains in job growth in coming months."
The smaller survey of households from which the unemployment rate is derived showed 6.9 million people with jobs reported they were working part-time because of the weather. That was the highest reading for February since the series started in 1978.
It also showed 601,000 people could not get to work because of the weather, the highest level for February since 2010. Economists said job growth in February would have been as high as 200,000 if not for the weather.
Payrolls averaged about 205,000 new jobs per month in the first 11 months of 2013, but that figure dropped to just 129,000 for December, January and February.
GROWTH SLOWDOWN TEMPORARY
Fed officials, from Chair Janet Yellen on down, view the recent economic weakness as largely weather-related and temporary. The policymakers have suggested it does not meet the high bar they have set in terms of what it would take for them to stop scaling back their bond-buying stimulus.
The Fed has already reduced its monthly bond purchases by $10 billion at each of its last two meetings, and a similar reduction is expected when officials next meet on March 18-19.
But the weather is not the only factor behind the lull in activity. Businesses are working through a huge pile of unsold goods accumulated in the second half of 2013, which means they have no incentive to place new orders with manufacturers.
In addition, the expiration of long-term unemployment benefits for more than one million Americans in December and cuts to food stamps are also hurting spending.
As a result of these temporary factors, growth in the first quarter is expected to slow to an annual rate below 2 percent. The economy grew at a 2.4 percent rate in the final quarter of 2013.
Economists welcomed the rise in the unemployment rate as a sign of labor market strength, since it was driven by Americans taking up the hunt for work.
"Evidently, the potential employees think the economy is improving and there are more jobs to be had," said Sung Won Sohn, an economics professor at California State University Channel Islands in Camarillo, Calif.
A measure of underemployment that includes people who want a job but who have given up searching and those working part-time because they cannot find full-time jobs dropped to 12.6 percent, its lowest level since November 2008.
Despite the improvement, the labor market is still far from a full recovery. The percentage of working-age Americans with a job, a broad gauge of labor market health, was steady at 58.8 percent last month. It has not risen much since the recession ended nearly five years ago.
In addition, the number of Americans who have been out of work for more than six months rose in January.
Job gains last month were fairly broad-based, with private sector payrolls rising 162,000 and government adding 13,000 jobs. Manufacturing payrolls rose by 6,000 jobs, the seventh straight monthly increase.
Construction payrolls, which surprised in January by logging hefty gains, increased by 15,000 last month.
Insurance employment recorded its largest gain since July, possibly boosted by implementation of President Barack Obama's signature healthcare law. Healthcare payrolls also advanced.
There were, however, declines in retail, information and transportation and warehousing employment.
Average hourly earnings rose nine cents.
"This gain, along with a rise in jobs, supports our case for better real incomes in 2014 and, thereby, a better outlook for consumer spending," said John Silvia, chief economist at Wells Fargo Securities in Charlotte, North Carolina.
(Reporting by Lucia Mutikani; Editing by Tim Ahmann, Paul Simao and Chizu Nomiyama)