Employers are hiring, but wage growth remains soft

The U.S. job market is showing healthy gains, but employee wages remain stuck in the mud.

The U.S. economy added 252,000 new jobs in December, the Labor Department said Friday, topping consensus estimates of 240,000. The nation's unemployment rate dropped to 5.6 percent, from 5.8 percent the previous month. The decrease was mostly the result of fewer people looking for work.

In another good sign, November's strong hiring report of 321,000 new jobs was revised up to 353,000; October was revised up 18,000 jobs to 261,000. Employers added an average of 246,000 per month last year, up from 194,000 in 2013.

Investors will be watching the employment data closely, as a sign not only of the American economy's health but also as an indicator of when the Federal Reserve might start raising interest rates.

"There is no batch of data that is viewed as being more important than the U.S. jobs report," said Craig Erlam, market analyst at Alpari in London. He says markets are likely to cheer a strong number, as investors have already accepted that interest rate increases from the Federal Reserve are on the horizon.

A missing piece of the puzzle in 2014, and in the recovery overall, was stronger earnings growth. Average hourly wages fell 0.2 percent in December, to $24.57, the Labor Department said Friday. For the year wages rose a meager 1.7 percent -- that's down from 1.9 percent in 2013.

Following a typical recession, wage growth should reach 3 percent or higher. Weak pay hikes are keeping workers' real income only slightly ahead of inflation, damping their purchasing power. Consumer spending accounts for roughly two-thirds of economic activity in the U.S., so an uptick in wages is vital to broader growth.

"Overall, there has been a clear acceleration in job growth since last summer, a faster decline in the unemployment rate, but few signs of faster wage growth," said Paul Dales, senior U.S. economist with Capital Economics, in a note.

Another major question for the job market in 2015 is whether slumping demand hindering growth across much of the world will bog down the U.S. recovery. Data out this week showed that prices and wages in the eurozone fell for the first time in more than five year.

Inflation has remained below the Fed's 2 percent target, a sign the economy continues to operate below capacity.

Also unclear is what overall impact the steep drop in oil prices since last summer will have on the economy. Although that has boosted Americans income in real terms, which is likely to drive spending, it could also lead to significant job losses in energy-related businesses.

Despite Europe's economic woes and a slowdown in Asia, most economists expect the U.S. to accelerate this year, forecasting growth of at least 3 percent. They also think the Fed will proceed with plans to raise interest rates in the second or third quarter, although persistently weak wage growth could affect policymakers' timing for the first rate hike.