The U.S. jobless rate fell to 9.4 percent in December, the lowest level in 19 months -- a reflection of more people finding jobs, but also of others giving up on looking for work.
The economy added 103,000 jobs last month, up from a revised total of 71,000 in November, according to the Labor Department. But most analysts were expecting the economy to add about 175,000 jobs.
The economy needs to generate about 125,000 jobs a month just to keep up with population growth and prevent the unemployment rate from rising. More than double that amount is needed to reduce the rate.
Most of the new jobs -- 103,000 -- came from the private sector while the government shed 10,000.
The drop in the unemployment rate was partly influenced by the fact that the government no longer counts people as unemployed when they stop looking for work.
Through all of 2010, the nation added 1.1 million jobs, or an average of 94,000 jobs a month. The economy still has a long way to go before it can fully recover from the 7 million jobs lost during the recession.
As expected, political reaction to the jobless report was divided along partisan lines. Democrats focused on the drop in the jobless rate while Republicans pounced on the fact that it is still above 9 percent.
"Today's jobs report provides evidence that the policies of the Democratic-led Congress are helping to create jobs and revitalize our economy -- adding more jobs in 2010 than President Bush did over eight years," House Minority Leader Nancy Pelosi said in a statement. "With so many Americans still looking for work, now is not the time to reverse course."
"Any signs of job growth are encouraging, but 9.4 percent unemployment and a $14 trillion debt are by no means adequate to get our economy growing," House Speaker John Boehner said in a a statement. "Hard work lies ahead to reduce uncertainty, start creating jobs again, and restore confidence in our economy."
Economists expect hiring will ramp up this year, with some predicting double last year's total of jobs or more. A tax cut package enacted last month should boost consumer and business spending.
But Federal Reserve Chairman Ben Bernanke told Congress Friday that while there's increasing evidence that a "self-sustaining" economic recovery is taking hold, the Fed's $600 billion Treasury bond-buying program is still needed because it will take years for unemployment to drop to more normal levels.
More people were hired in previous months than the government first estimated. The economy added 210,000 jobs in October, above the previous figure of 172,000. November's total was revised up from 39,000.
Fewer people said they were out of work last month. The number of unemployed fell by more than 500,000 to just under 14.5 million.
Still, the unemployment rate has topped 9 percent for 20 months, the longest such streak on record. And even with last year's job gains, the unemployment rate fell only from 9.7 percent to 9.4 percent.
The Associated Press contributed to this report.