U.S. unemployment falls to 6-year low of 5.5% in February

U.S. job creation powered ahead in February, with unemployment falling to a six-year low of 5.5 per cent.

U.S. employers added 295,000 jobs in the month, the 12th straight month that the economy added more than 200,000 jobs.

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But economists sounded a note of caution over the numbers, pointing out that wage gains were low and the unemployment rate sank in part because so many people left the labour force.

The average hourly wage rose just three cents to $24.78 an hour. Average hourly pay has now risen just two per cent over the past year, barely ahead of inflation.

An estimated 178,000 people gave up looking for work or dropped out of the labour force, another indication that there is still slack in the U.S. labour market.

Fed's rate decision

The U.S. Federal Reserve is looking closely at indicators such as labour participation and wage growth as it makes its decision when to raise interest rates.

The Fed has a target for unemployment of 5.2 per cent to 5.5 per cent. But with the upper end of that target now achieved, it is looking more broadly at other economic factors.

The U.S. economy slowed to 2.2 per cent growth rate in the final three months of 2014, but many economists believe it will pick up in 2015.

February's strong jobs showing comes despite harsh winter weather and strikes in some refineries. 

"On the whole, the report suggests that the U.S. labour market continues to power on in spite of the harsh winter, labour disruptions, and a challenging external environment," said TD senior economist Michael Dolega.

"Having said that, there is still room for improvement, with the Fed unlikely to rush into rate hikes until wages and inflation indicators begin to heat up," he added in a note to investors.

There are complicating factors such as the decline in oil prices, which will throw people working in the oilpatch out of work and the strong U.S. dollar, which could eat into sales of U.S. goods overseas.

But markets interpreted the drop in job numbers as a sign that the Fed decision on rates is getting closer, with the Dow falling in early trading.

Reaching the 5.5 per cent unemployment target is seen as a milestone.

"This is quite a symbolic change that increases the pressure on the Fed to hike rates in June," said Paul Dales, an economist at Capital Economics said.