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The U.S. unexpectedly lost 85,000 jobs in December, supporting Federal Reserve forecasts that a labor market recovery will take time and making it more likely interest rates will stay near zero for the next six months.

Payrolls fell last month after a revision showed a gain of 4,000 in November, the first in almost two years. The median estimate of economists surveyed by Bloomberg News projected no change in December. The jobless rate held at 10 percent.

Treasury yields and the dollar slid as traders increased bets the Fed will keep interest rates near a record low for “an extended period.” While job cuts have slowed, companies are holding back on hiring as they gauge the strength of the economic recovery and contend with tight credit.

“There is still a lot of caution about the recovery because of lingering credit-crunch effects,” said Jim O’Sullivan, chief economist at MF Global Inc. in New York, who forecast a payrolls decline of 100,000. “It’s just a matter of time, probably a month or two, before the trend in payrolls turns positive on a sustained basis.”

The yield on the two-year Treasury note fell to 0.97 percent at 4:23 p.m. in New York from 1.02 percent late yesterday. The dollar slid from a four-month high against the yen, dropping 0.8 percent to 92.64 yen from 93.37 yesterday.

Stocks rose for a fifth day on optimism about earnings. The Standard & Poor’s 500 Index gained 0.3 percent to 1,144.98.

Labor Participation

The survey of households, used to calculate the unemployment rate, showed employment dropped by 589,000 workers last month. A decrease of 661,000 in the number of people saying they were in the labor force prevented the jobless rate from rising. The participation rate, or the share of the population in the labor force, fell to 64.6 percent, a 24-year low.

The so-called underemployment rate — which includes part- time workers who’d prefer a full-time position and people who want work but have given up looking — rose to 17.3 percent from 17.2 percent.

United Parcel Service Inc., the world’s largest package- delivery company, said today that it plans to cut 1,800 jobs as it reduces the number of U.S. operating districts. Atlanta-based UPS is considered a bellwether for the economy because it delivers goods ranging from auto parts to financial documents.

A separate report showed inventories at wholesalers jumped in November by the most in five years, indicating stockpiles will provide a bigger boost to fourth-quarter economic growth. The 1.5 percent gain, the biggest since October 2004, followed a 0.6 percent rise, Commerce Department figures showed.

Fourth-Quarter Growth

Economists at Macroeconomic Advisers said in an e-mail to clients that they raised their fourth-quarter growth forecast to 5.4 percent, from 4.9 percent before the wholesale report. Gross domestic product increased 2.2 percent in the third quarter.

Consumer credit slumped a record $17.5 billion in November as unemployment close to a 26-year high discouraged borrowing, Fed figures showed today. Revolving debt, such as credit cards, plunged by a record $13.7 billion. Auto loans also declined.

Payrolls were forecast to be unchanged, according to the median estimate of 76 economists surveyed by Bloomberg News. Estimates ranged from a decrease of 100,000 to a gain of 85,000. The November reading was revised from an initially reported 11,000 decline.

Over the past two years, the drop in payrolls has been the biggest as a percentage of all jobs since World War II was ending in 1944-45.

Obama Administration

The Obama administration is under pressure because about half of the jobs lost during the recession have occurred since the president’s inauguration in January of last year.

“This is a very stubborn recession,” Labor Secretary Hilda Solis said in an interview today on Bloomberg Television. “We’re going to have to work harder to create jobs.”

Mike Curtis, a former Chrysler LLC service and parts manager, moved to Texas in December after failing to find steady work in California or Illinois for more than a year.

He said he sent 50 resumes to employers such as FedEx Corp., United Parcel Service Inc. and Home Depot Inc.

“Worst-case scenario, if I can’t find something in the next two months, I’ll pack up and go somewhere else,” said Curtis, 43, who lives with a friend near Dallas. “But where do I go?” he said. “I’m frightened right now. I’d like to have a steady paycheck, but can’t seem to find anything.”

Today’s report showed factory payrolls declined 27,000 after decreasing 35,000 in the prior month. Payrolls at builders fell 53,000 after declining 27,000.

Weather’s Impact

The number of people with jobs who were unable to work because of bad weather during the survey week rose 241,000 last month, the biggest increase since January 2009.

Service industries, which include banks, insurance companies and retailers, subtracted 4,000 workers after adding 62,000 in November.

President Barack Obama on Dec. 8 proposed more spending on the nation’s transportation system and tax credits to spur hiring by small businesses in a second round of efforts to cut the jobless rate. In early 2009, the administration forecast the $797 million stimulus plan would keep unemployment below 8 percent.

In another boost, the Census Bureau will hire 1.15 million temporary workers in the first half of the year to conduct the population count that takes place every 10 years. That hiring may boost payrolls by a peak of 700,000 in May before those workers begin getting dismissed in June, according to a forecast by Lori Helwing at BofA Merrill Lynch Global Research in New York.

The number of temporary workers rose 46,500 in December, the fifth straight gain. Payrolls at temporary-help agencies often turn up before total employment as companies await stronger demand.

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