US hiring surge drives unemployment down to 5 percent, boosts chances of Fed rate hike

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FILE - In this Tuesday, Oct. 6, 2015, file photo, people attend a job fair at Dolphin Mall in Miami. The federal government issues its October jobs report Friday, Nov. 6, 2015. (AP Photo/Wilfredo Lee, File)

WASHINGTON — U.S. hiring swelled in October by the largest amount all year, and unemployment dropped another notch to 5 percent, increasing the likelihood that the Federal Reserve will raise interest rates next month for the first time in a decade.

With Americans spending more on everything from restaurant meals and clothing to new cars, employers added an impressive 271,000 jobs last month.

That was a strong rebound from August and September, when turmoil in China and other economies overseas proved a drag on the U.S. job market.

Unemployment declined from 5.1 percent in September and is now at its lowest point since April 2008, just a few months after the Great Recession began.

Even before Friday's report, expectations for a Fed rate increase in December were building. Fed chief Janet Yellen and other top officials said this week that the economy is generally healthy and a move at next month's meeting is a "live possibility."

"This data tips the scales toward a rate hike in December, but more importantly is a sign that our economy may have more punch than we thought," said Tara Sinclair, chief economist for job site

The Fed cut the short-term rate it controls to a record low of nearly zero in December 2008 to try to stimulate growth during the recession. An increase would eventually raise borrowing costs for mortgages, auto loans and business loans.

The prospect of higher interest rates initially drove down financial markets Thursday, though stock indexes finished mixed. The yield on the benchmark 10-year Treasury note surged to 2.33 percent from 2.23 percent, suggesting that investors see a greater likelihood of a rate increase.

After a prolonged period of relatively stagnant pay for many Americans, hourly wages climbed a solid 9 cents in October to $25.20. Average pay is up 2.5 percent in the past year, the largest annual gain since 2009.

Strong hiring and pay raises, if they continue, could make it harder for Republicans to mount effective attacks on the Obama administration's economic record and could bolster Democratic prospects in the 2016 elections.

The pay gains should fuel more consumer spending in coming months, which, in turn, could support further hiring.

"These are very strong numbers and likely to continue," said Carl Tannenbaum, chief economist at Northern Trust. "The two summer months that were low now look like the aberration."

Manufacturing employment was flat in October, after two months of job cuts. The strong dollar and faltering growth in China, Europe and Japan have cut into exports of factory goods. Oil and gas drillers also shed workers as oil prices stayed low.

But retailers added nearly 44,000 jobs last month, a sign that they expect a good holiday shopping season. Hotels and restaurants added 41,000, while health care providers hired nearly 57,000.

Higher-paying sectors also gained, notably professional and business services, which include architects, engineers and many IT workers. That sector added 78,000 positions, the most in nearly a year.

Matt Friedman, chief executive of the Wing Zone restaurant chain, said he thinks lower gas prices are encouraging more people to eat out and boosting sales at his company's 93 U.S. sites. Company sales have grown 6 percent this year from 2014.

Wing Zone expects to open 15 stores this year and 19 next year.

"People are spending more money," Friedman said. "Fuel prices have a big impact."

The company receives plenty of applications for its hourly jobs and hasn't had to increase pay for those positions to attract applicants, Friedman said.

But it has had to raise pay to fill professional jobs in marketing, training and operations, he said. Pay for those positions has increased about 10 percent in the past two years.

Eric Renninger, vice president of Honest-1 Auto Care, said his 54-shop chain is seeing evidence that cheaper gas is encouraging more travel.

"You are seeing people bringing in vehicles in preparation for road trips," he said. The company expects to open five more locations this year.

The economy grew at just a 1.5 percent annual rate in the July-September quarter. Still, Americans boosted their spending at a healthy 3.2 percent annual pace.

Economists expect growth to rebound to 2.5 percent or more in the final three months of the year.

AP Economics Writers Josh Boak and Paul Wiseman contributed to this report.

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