By Lucia Mutikani
WASHINGTON (Reuters) - U.S. job growth was stronger than expected in June and the employment count for the prior two months was revised higher, showing the economy on solid ground and likely keeping the Federal Reserve on track to scale back its massive monetary stimulus later this year.
Employers added 195,000 new jobs to their payrolls last month, the Labor Department said on Friday, while the unemployment rate held steady at 7.6 percent as more people entered the workforce.
The government revised it count for April and May to show 70,000 more jobs created than previously reported.
The data offered an encouraging sign on the health of the U.S. economy, which has been advancing steadily despite higher taxes, government spending cuts and signs of weakness overseas.
U.S. stock prices jumped as markets opened, while the dollar strengthened. Prices for U.S. government bonds fell as traders braced for a slowing in the bond purchases the Fed has been making to keep borrowing costs low.
"The strong advance in the employment count provides support for the Federal Reserve to start to taper back on its quantitative easing in the near future," said Kathy Bostjancic, director of macroeconomic analysis at the Conference Board.
Two weeks ago Fed Chairman Ben Bernanke said the U.S. central bank expected to start cutting back later this year on the $85 billion in bonds it is purchasing each month and would likely bring the program to a complete close by the mid-2014.
Economists polled by Reuters had expected employment to increase 165,000 last month and the jobless rate to fall a tenth of a percentage point to 7.5 percent.
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Over the last three months, job growth has averaged 196,333 per month, in line with the 200,000 jobs that economists say the Fed wants to see each month.
In a further bright sign, weekly hourly earnings rose by the most since November. The report, together with other relatively upbeat data on housing, auto sales and manufacturing, makes it more likely the Fed will proceed with its tapering plan.
Twenty-eight of 60 economists polled by Reuters in late June said they expect the Fed to begin dialing back its purchases in September, and economists on Friday said the jobs data fit with that timetable.
The recent signals from Bernanke that a start date for reducing bond purchases is approaching triggered a global selloff in stock and bond markets, which have come to rely on the Fed as a steady source of demand for financial assets.
Stocks prices have turned around since then, but bond prices have continued to drop. The move away from bonds has raised borrowing costs for both companies and consumers, presenting a fresh headwind for the economy's recovery.
LABOR MARKET GATHERS STRENGTH
The central bank is closely watching the unemployment rate. It has said it expects the jobless rate to drop to around 7 percent by the middle of next year, when it anticipates ending the bond purchases.
The jobless rate was unchanged last month because the labor force swelled - a sign Americans were growing more confident they could find a job.
It was the third consecutive monthly increase in the workforce and it lifted the participation rate - the share of working-age Americans who either have a job or are looking for one - further away from a 34-year low touched in March.
Declining labor force participation as older Americans retired and younger people gave up the hunt for work had accounted for much of the drop in the unemployment rate from a peak of 10 percent in October 2009.
An even broader gauge of the health of the labor market - the percentage of working age Americans with a job - also rose, reaching 58.7 percent, its highest level since November.
However, a measure of underemployment that includes people who want a job but who have given up searching and those working part time because they cannot find full-time jobs jumped to 14.3 percent from 13.8 percent in May.
GOVERNMENT STILL WEIGHS
All the job gains in June were in the private sector, where payrolls increased by 202,000 after rising 207,000 the prior month.
Government employment, in contrast, dropped 7,000 jobs after falling 12,000 in May. Economists, however, say the job losses are probably not due to the deep government spending cuts known as the sequester as most agencies are relying on furloughs.
Consumer-related areas such as retail and wholesale trade showed further gains in employment in June, reflecting strengthening demand that was highlighted by a surge in automobile sales. Retail jobs increased 37,100 last month after advancing 26,900 in May.
Manufacturing payrolls fell by 6,000 jobs, declining for a fourth straight month. Construction employment rose 13,000 adding to May's 7,000 jobs as the housing recovery pushes ahead.
Hiring in the health care and social assistance sector increased 23,500 after slowing in May. Temporary help rose 9,500 after adding 23,600 jobs in May.
Average hourly earnings rose 0.4 percent or 10 cents. In the 12 months through June, earnings were up 2.2 percent, the largest increase since July 2011. Tepid wage growth has been holding back the consumer-driven economy.
The length of the average workweek held steady at 34.5 hours for the third straight month. (Reporting by Lucia Mutikani; Editing by Andrea Ricci and Tim Ahmann)
