WASHINGTON - U.S. job creation ground to a halt in December, casting doubt on forecasts that faster economic growth this year will create jobs.

The unexpectedly weak report was bad news for President Bush, who is counting on a jobs revival to boost his re-election campaign.

The number of jobs nationwide grew by a scant 1,000 last month, the Labor Department reported Friday. The unemployment rate fell to 5.7 percent from 5.9 percent the previous month, but that was because more people gave up looking for work, and official statistics don't count them as unemployed.

The unexpectedly weak report was bad news for President Bush, who is counting on a jobs revival to boost his re-election campaign.

"Neither business nor potential employees have confidence in the economy," said Sung Won Sohn, the Minneapolis-based chief economist at Wells Fargo bank.

The jobs data sent stocks down. The Dow Jones Industrial Average dropped 133.55 points to 10,458.89, shedding much its advance from earlier this week. The tech-heavy Nasdaq composite index finished at 2,086.92, down 13.33.

The report renewed questions about whether even the healthy economic recovery expected this year will be sufficient to overcome the caution of business owners and finally spark some hiring.

Job growth, which had risen to 100,000 jobs a month in September and October, fell to 43,000 in November before all but drying up last month.

Some temporary factors, including a California supermarket workers strike and weak temporary holiday hiring, may have depressed payrolls the last two months.

Still, analysts had expected the job market to rebound in December and add about 125,000 jobs.

Overall, the economy shrank by 74,000 jobs last year, an improvement over declines of 463,000 in 2002 and 1.8 million in 2001. The trend suggests that layoffs have eased, but new hiring has yet to pick up.

Rapid gains in productivity - a measure of the output per hour of labor - have slowed job creation as technology and other advances have allowed companies to produce more with fewer workers. That has driven up profits, rather than increasing wages or new hires.

"Firms, not workers, have captured almost all of the recent productivity gains," said Jan Hatzius, an economist with Goldman Sachs in New York.

Heightened competition from abroad has also driven firms to hold down labor costs or move jobs overseas, a trend that could affect the economy for many years.

"There's real concern (that) changes in the economy are going to suppress job growth for a longer period," said Sophia Koropeckyj, who tracks labor markets at Economy.com, an economic analysis firm in West Chester, Pa.

Democratic presidential candidates quickly jumped on the report to criticize President Bush.

"What further proof do we need that George Bush's economic policies are a failure for working Americans?" said former Vermont governor Howard Dean.

"President Bush can't sweep under the rug the fact that more than 8 million people are hunting for work and there just aren't enough jobs," said another challenger, Sen. John Edwards of North Carolina.

Bush, in an appearance with small-business owners at the Commerce Department, focused on the drop in the unemployment rate.

"I'm optimistic because I see things happening," he said. "Unemployment dropped today to 5.7 percent. That's not good enough. We want more people still working. But nevertheless, it is a positive sign that the economy is getting better."

He called on Congress to make his tax cuts, due to expire by 2011, permanent, saying such a move would boost job creation.

Economists said that the rate of unemployment fell not because more people found jobs but because many people stopped looking for work, contributing to a decline in the labor pool by about 300,000.

Including those who have given up looking for work, the total unemployment rate would be close to 7 percent, said Ian Morris, the New York-based chief U.S. economist for HSBC, a British bank.

The unemployment rate for blacks was virtually unchanged at 10.3 percent, while the rate for Hispanics fell to 6.6 percent. The teenage unemployment rate was 16.1 percent. Unemployment for whites was 5.0 percent.

"In stark terms, when recession hits, African-American unemployment is nearly double the rate of white unemployment," said Marc Morial, president of the National Urban League, a New York-based group that promotes African-American advancement.

Stores, factories and financial institutions cut jobs in December. Retail jobs fell by 38,000, despite a strong holiday shopping season. Factory employment dropped 26,000, including 3,000 fewer jobs at textile mills. Financial services declined by 12,000 jobs, as higher interest rates reduced applications to refinance mortgages.

Those losses were offset by gains elsewhere, including 30,000 more temporary jobs, 14,000 more construction jobs and 21,000 more jobs in health and education.

Some economists believe the job market is not as bad as reported, because the monthly Labor Department survey typically doesn't capture all the job growth in the early stages of a recovery.

The survey, based on payroll records from 160,000 businesses and government agencies, misses some job growth at small and start-up companies.

On the Web: The Labor Department's December jobs report at www.bls.gov/news.release/empsit.toc.htm

Copyright © 2004 Reuters Ltd

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