Employment grew solidly for a second month in March and the jobless rate hit a two-year low of 8.8 percent, underscoring a decisive shift in the labor market that should help to underpin the recovery.

Nonfarm payrolls rose 216,000 last month, the largest increase since May, the Labor Department said on Friday. The gain built on the 194,000 new positions added in February.

The quickening pace of job growth has pulled down the unemployment rate a full percentage point since November.

A separate report from the Institute for Supply Management showed factory activity grew strongly last month, although it backed off a nearly seven-year high hit in February. It was still the 20th straight month of expansion.

The employment report confirmed the jobs market was strengthening despite signs economic activity had been held back early in the year by bad weather and rising energy prices. Still, the data was likely not strong enough to push the Federal Reserve off its ultra-easy monetary policy course.

It provides more evidence that the economy is gaining a self-sustaining momentum, but it also says we still have a long way to go, said Julia Coronado, a senior economist at BNP Paribas in New York.

The economy has recovered only a fraction of the more than 8 million jobs lost in the recession. Economists say job growth of between 250,000 and 300,000 a month is needed to have a sizable impact on the pool of 13.5 million jobless Americans.

Investors on Wall Street cheered the sturdy employment report and lifted the blue-chip Dow Jones industrial average to its highest level since June 2008. U.S. government bond prices were little changed, while the dollar climbed to a more than six-month high against the yen.

The improvement in the labor market comes as Fed officials are sharply divided on whether the economy still needs monetary support. Some policymakers argue the recovery is still not strong enough, while others worry about inflation if interest rates are kept too low for too long.


The report showed no price pressure from earnings, which were flat in March and have barely grown so far in 2011.

New York Fed President William Dudley said the growth in jobs was encouraging but cautioned against too much optimism.

We are still very far away from achieving our dual mandate of maximum sustainable employment and price stability, Dudley said in Puerto Rico.

Investors reacted to the jobs report by increasing their bets on the Fed tightening credit by the end of 2011 but they rowed back a bit after Dudley's cautious comments on the state of the economy.

The private sector accounted for all the new jobs in March, adding 230,000 positions after February's 240,000 increase. Government employment fell 14,000, declining for a fifth straight month as local governments let go 15,000 workers.

Employment gains in March were concentrated in the private services sector, which added 199,000 jobs. Payrolls in the goods-producing industries rose 31,000, but manufacturing employment growth slowed to 17,000 from 32,000 in February.

Construction remained a weak point, with jobs in that industry dipping 1,000 in March after rising 37,000 in February. A report issued by the Commerce Department on Friday showed construction spending fell in February to its lowest level since October 1999.

Although rising energy prices -- boosted by unrest in the Middle East and North Africa -- are eroding consumer confidence, economists do not expect businesses to put the brakes on hiring just yet. They saw a limited impact on the economy from the devastating earthquake and tsunami in Japan.

The labor market evidence suggests that the economy has good momentum that will allow it to absorb the twin shocks from the Middle East and Japan without too much damage to growth, said Nigel Gault, chief U.S. economist at IHS Global Insight in Lexington, Massachusetts.


The drop in the unemployment rate from 8.9 percent in February took it to its lowest level since March 2009 and came even as more people entered the labor force, a signal of rising optimism.

The rate could start rising as the improving employment picture increasingly coaxes those who have given up the search for work to re-enter the labor market.

Last month, 45.5 percent of the unemployed had been out of work for 27 weeks or more.

It is always possible that as the job market improves, people will start looking again and the unemployment rate could go up, said Bill Cheney, chief economist at John Hancock Financial Services in Boston.

But the normal pattern is once it starts coming down as rapidly as it has over the last few months, it keeps on going down.

(Additional reporting by Doug Palmer; Editing by Andrea Ricci)