There were, however, potential red flags in the closely watched employment report from the Labor Department on Friday. While the unemployment rate held at 3.7% last month, that was because 676,000 people left the labor force. Some economists attributed this to difficulties adjusting the data for seasonal fluctuations.

The economy also added 71,000 fewer jobs in October and November than previously reported. Nonetheless, the report indicated that the economy avoided a recession last year and would likely continue to grow through 2024 as labor market resilience supports consumer spending.

"This report lowers the probability of the Fed cutting in March and confirms our view that the Fed will not begin cutting as soon as the markets expect," said Jeffrey Roach, chief economist at LPL Financial in Charlotte, North Carolina.

Nonfarm payrolls increased by 216,000 jobs last month, the Labor Department's Bureau of Labor Statistics said. Economists polled by Reuters had forecast payrolls rising by 170,000 jobs. The economy added 2.7 million jobs in 2023, a sharp step-down from the 4.8 million positions created in 2022.

That reflected cooling demand in the economy following 525 basis points worth of rate hikes from the U.S. central bank since March 2022. Roughly 100,000 jobs per month are needed to keep up with growth in the working age population.

Government hiring as state and local governments try to bring education staffing back to pre-pandemic levels led the rise in employment last month, with 52,000 jobs added.

Government payrolls growth averaged 56,000 jobs per month in 2023, more than double the average monthly of 23,000 in 2022.

Employment in the healthcare sector increased 38,000, spread across ambulatory health care services and hospitals. Unseasonably mild weather boosted hiring at construction sites, with payrolls in the industry rising 17,000.

Leisure and hospitality employment gained 40,000. Employment in the industry is below its pre-pandemic February 2020 level by 163,000. Retail employment rose 17,000. But employment in transportation and warehousing industry fell 23,000.

Average hourly earnings rose 0.4%, matching the prior month's gain. That raised the year-on-year increase in wages to 4.1% from 4.0% in November.

The dollar rose against a basket of currencies. U.S. Treasury prices fell. Financial markets trimmed bets for a March rate cut to roughly 53% from about 65% earlier.

SOFT HOUSEHOLD DETAILS

The Fed held its policy rate steady in the current 5.25%-5.50% range last month and policymakers signaled in new economic projections that the historic monetary policy tightening engineered over the last two years is at an end and lower borrowing costs are coming in 2024.

The share of industries reporting job growth increased last month, which could help to assuage concerns that hiring was too concentrated in a few sectors.

With December's employment report, the government incorporated annual revisions to the seasonally adjusted household survey data, from the which the unemployment rate is derived, for the past five years.

The revisions had little impact on the jobless rate or the labor force participation rate. The unemployment rate has risen from a five-decade low of 3.4% in April amid an influx of people into the labor force, some of it tied to a rise in immigration.

Household employment plunged 683,000 in December, while about 676,000 people left the workforce last month. Household employment tends to be very volatile. The labor force participation rate, or the proportion of working-age Americans who have a job or are looking for one, fell to 62.5% from 62.8%.

"These changes are big enough to be noteworthy, but less concerning because they are in the same direction, suggesting there could be a seasonal adjustment issue accounting for the big declines," said Chris Low, chief economist at FHN Financial in New York. "We'll be watching household employment closely for the next few months."