By Lucia Mutikani
WASHINGTON (Reuters) - U.S. employers hired more workers than expected in November and the jobless rate hit a five-year low of 7.0 percent, raising chances the Federal Reserve could start ratcheting back its bond-buying stimulus as soon as this month.
Nonfarm payrolls increased by 203,000 jobs last month, following a similarly robust rise in October, the Labor Department said on Friday. The report, which showed broad gains in employment and a rise in hourly earnings, suggested strength in the economy heading into year-end.
"It will add further confidence to the Fed of a reduced need for monetary stimulus in the U.S. economy. We now see the bias shifting in favor of a January tapering announcement," said Millan Mulraine, senior economist at TD Securities in New York.
The unemployment rate dropped three tenths of a percentage point to its lowest level since November 2008 as some federal employees who were counted as jobless in October returned to work after a 16-day partial shutdown of the government.
The decline came even as the participation rate - the share of working-age Americans who either have a job or are looking for one - bounced back from October's 35-1/2-year low.
A separate report showed improving labor market prospects buoyed consumer confidence in early December.
Contributing to its firm tone, the jobs report showed that the length of the average workweek reached a three-month high and that 8,000 more workers were hired in September and October than previously reported.
In addition, 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 fell to a five-year low.
U.S. benchmark Treasury yields hit a three-month high as traders raised bets the Fed could reduce its bond purchases as early as its next meeting on December 17-18, though they later eased back and finished the day little changed. Major U.S. stock indexes rose, with the S&P 500 ending a five-day losing streak with its best gain in nearly a month.
The financial market reaction showed investors are less anxious about the Fed's impending wind down of asset buying than six months ago, when the first hints from Fed leaders of a pullback sent stock prices tumbling and bond yields surging.
The central bank has been buying $85 billion in Treasury and mortgage-backed bonds each month to hold long-term borrowing costs down in a bid to spur a stronger economic recovery.
Chicago Fed President Charles Evans, who has been an outspoken advocate for the Fed's stimulus program, said on Friday he was open to trimming purchases this month, although he would prefer to see an even healthier jobs market.
"I'll be open-minded," he told Reuters Insider. "Everything else (being) equal, I would like to see a couple of months of good numbers, but this was improvement."
Many economists still expect the central bank to wait until March before dialing back its bond purchases, but a Reuters poll of big bond dealers found a growing number now see December or January as likely.
MIXED ECONOMIC DATA
While labor market and consumer spending indicators are strengthening, the housing market and business spending have slowed. Inflation is still low, which economists say will make Fed officials cautious in pulling back its stimulus.
Economists also believe the Fed will be wary of dialing back bond purchases before lawmakers strike a deal to fund the federal government. That could come as soon as next week, however. Congressional aides have said negotiators are down to the final details.
A separate report from the Commerce Department showed consumer prices were steady in October, after having risen by 0.1 percent for three straight months. Over the past 12 months, prices rose 0.7 percent, the smallest gain since October 2009.
Excluding food and energy, prices were up just 0.1 percent for a fourth straight month. These so-called core prices were up only 1.1 percent from a year ago. Both inflation measures remained well below the Fed's 2 percent target.
"While fiscal issues appear less ominous and employment prospects look favorable, we still think that before pulling back on asset purchases the Fed would like to see more evidence that housing is stabilizing and that inflation is finding a floor," said Michael Feroli, an economist at JPMorgan.
The drop in the unemployment rate brought it closer to the 6.5 percent level that policymakers said would trigger discussions over when to raise interest rates from their current levels near zero.
Some economists think the Fed will lower that threshold to convince markets that any rate hike is a long way off.
"We expect that when tapering starts, it will be coupled with stronger forward rate guidance, including a cut in the unemployment rate threshold," said Ted Wieseman, an economist at Morgan Stanley in New York.
The job gains in November were broad-based, with 63.5 percent of industries increasing employment. Private-sector payrolls rose 196,000. But government employment also increased as hiring by state and local governments offset a drop in federal employment.
Manufacturing payrolls moved up 27,000, the fourth straight monthly gain and the largest since March 2012. Construction employment rose 17,000, building on an October increase even though the housing market has lost some momentum.
Growth in retail employment slowed, with the sector adding 22,300 last month compared to 45,800 in October. A late Thanksgiving holiday could have resulted in some seasonal hiring not being captured in November's report.
Leisure and hospitality, as well as professional and business services payrolls, showed gains, but at a slower pace than in October.
Average hourly earnings rose by four cents last month, while the length of the workweek edged up to an average of 34.5 hours from 34.4 hours - both bullish signs for the economy.
(Reporting by Lucia Mutikani, Additional reporting by Ryan Vlastelica in New York and Ann Saphir in Chicago; Editing by Andrea Ricci and Diane Craft)