Greg Ip writes about Friday's employment report for the weekend edition of the Wall Street Journal:

WSJ.com - Job Growth Slows In Sign Economy Might Be Cooling: By GREG IP Staff Reporter of THE WALL STREET JOURNAL January 7, 2006; Page A3:

Job growth slowed in December, a sign the economy may have lost some steam, but the labor market was still healthy enough for wage growth to pick up.

Nonfarm payroll employment rose just 108,000 from November, the Labor Department said Friday, about half the increase Wall Street economists expected. However, November's job gains were revised up sharply to 305,000 from 215,000. Economists said the 206,500 average for the two months is a better indication of underlying employment growth than the figures for November or December alone.

There were many encouraging signs in the report. The unemployment rate slipped to 4.9% from 5%, matching October's four-year low, according to revised data. Hourly wages rose 0.3% from November and 3.1% from a year earlier, the biggest annual gain in almost three years -- though still below the most recently reported inflation rate. Manufacturing employment rose 18,000, its third straight increase. Moreover, claims for unemployment insurance in recent weeks have been low, suggesting employment growth maybe stronger in January than in December.

Still, the softer December job creation followed a report earlier in the week that manufacturing activity, too, had slowed unexpectedly in December. A survey by the National Federation of Independent Business found that fewer of its small business members are hiring: just 13% added jobs in December, down from a 17% average in the prior two months, while 12% reduced jobs, up from 6%. This handful of indicators suggests overall economic growth may have slowed from its 4% pace of the past two years.

Monthly employment growth averaged 188,000 jobs from January 2004 through last August, before Hurricane Katrina pummeled the Gulf Coast states. Maury Harris, chief U.S. economist at UBS Securities, predicted average monthly gains would fall to 145,000 this year as the housing market cools. He noted that real-estate-related occupations, such as mortgage and real-estate brokerage jobs, specialty trades, furniture manufacturing and construction, have been adding jobs at the rate of 25,000 a month for the past two years. That won't continue this year, he said: "You've seen all the signposts" of a slowdown.

Construction employment fell by 9,000 jobs in December, the first drop in nearly two years, but that followed a hefty 42,000 gain in November. Retail employment also dropped, by 16,000. The actual number of retail jobs went up, as it usually does around the holiday period, but the Bureau of Labor Statistics adjusts the data to eliminate recurring seasonal effects. "Seasonal hiring was less than usual," BLS Commissioner Kathleen Utgoff said in a statement. Some economists predict fewer post-holiday layoffs than usual in January, leading to a rebound once the data are seasonally adjusted.

Many economists blamed the weakness in construction and retail hiring on cold weather during the week for which the BLS surveyed employers and households. Morgan Stanley economist Dave Greenlaw noted that the household survey, used to determine the unemployment rate, estimated that 253,000 people didn't work that week because of weather, 100,000 more than the December average of the prior five years.

But Angie Clinton, a BLS economist, said, "Typically, weather does not impact employment that much," though wet weather in the Southeast and on the East Coast may mean working hours were trimmed. She said that retail employment has tended to rise less in December in the past five years than in the prior six years. But she also noted that retail employment, seasonally adjusted, has declined in four of the past five months. That suggests underlying weakness, not a shift in holiday hiring patterns, may be the cause.

The latest employment report sends mixed signals to the Federal Reserve, which is mulling when to stop raising interest rates. After raising its overnight lending rate target to 4.25% in December, Fed officials concluded that the likely number of additional increases is "not large," according to minutes of that meeting released Tuesday.

Write to Greg Ip at greg.ip@wsj.com