updated 7/7/2006 5:44:57 PM ET 2006-07-07T21:44:57

U.S. employers added a disappointing 121,000 jobs last month, wary of bulking up payrolls with the economy slowing and energy prices rising. Wages rose sharply, fanning inflation worries.

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Wall Street groaned and stocks tumbled. The Dow Jones industrials lost 134.63 points to close at 11,090.67.

The latest employment snapshot, released by the Labor Department on Friday, also showed that the nation’s civilian unemployment rate held steady at 4.6 percent.

In some ways, the report crystalized the conflicting economic forces that Federal Reserve Chairman Ben Bernanke and his colleagues must weigh as they decide what to do next with interest rates.

On one hand, slowing economic growth might justify the Fed taking a break in its two-year credit-tightening campaign. On the other hand, rising prices and wages might warrant another rate increase to prevent inflation from taking off.

The count of new jobs added to the economy in June did mark an improvement from the 92,000 new positions logged in May — the fewest in seven months. But it still fell short of economists’ forecasts for an increase of around 175,000.

“Economic growth is moderating so nobody is on a hiring spree,” said Richard Yamarone, economist at Argus Research.

Job cuts by department stores and other retailers, home builders, telecommunications companies and other firms tempered overall job growth. Health care firms, factories, accountants and bookkeepers, computer designers, bars and restaurants, and state and local governments were among those boosting payrolls.

For the April-to-June quarter, employers added an average of 108,000 jobs a month. That’s down from the average of 176,000 a month for the January-to-March period.

That moderation in job growth comes as companies cope with rising energy prices and interest rates and try to determine how much of a slowdown in overall economic activity the country is likely to encounter in the months ahead.

“Business owners are trying to get a good handle on whether it is the right time to spend that extra money” in terms of boosting hiring as well as other investment, said John Challenger, chief of Challenger, Gray & Christmas, an employment research firm.

Workers’ average hourly earnings, meanwhile, jumped to $16.70 in June, a sharp 0.5 percent increase from May. Economists were expecting a more modest rise of 0.3 percent.

For the last 12 months, wages have gone up 3.9 percent, the largest annual increase since June 2001. Nonetheless, economists said those wage gains are still trailing inflation.

With the overall health of the labor market still solid, some economists thought the wage growth meant some workers are gaining a bit of bargaining power in negotiating bigger paychecks. Others, however, thought the wage growth might be more related to last month’s mix of jobs — the loss of lower paying retail positions and the gain of higher paying factory jobs.

Wage improvement is good for workers but a rapid and sustained acceleration can ignite inflation.

“Inflation is still on the Fed’s mind in a big way and this is liable to make it stay there,” said Bill Cheney, economist at John Hancock Financial Services.

To fend off inflation, the Fed bumped up interest rates last week to 5.25 percent, the highest in more than five years.

Economists worried about inflation predicted another increase would come when the Fed meets next on Aug. 8. Others, however, think the Fed will leave rates alone; they believe slower economic growth will eventually lessen inflation pressures.

The economy probably logged growth of around a 2.5 percent pace in the April-to-June quarter and could clock in close to 3 percent in the current July-to-September period, analysts said. That would mark a considerable slowdown from the first quarter’s 5.6 percent pace, the fastest in 2½ years.

Even as the economy has slowed, inflation — led by surging energy prices — has moved higher.

Oil prices, which closed at a new record high of $75.19 a barrel Wednesday, climbed as high as $75.78 a barrel Friday before easing to $74.09 a barrel. Gasoline prices have topped $3 a gallon in some cities.

President Bush, coping with low job-approval ratings, said the economy is fundamentally in good shape and that taxes must be kept low to “keep economic vitality alive.”

Democrats counter that the president’s tax cuts plunged the government’s balance sheets into red ink and mainly helped the wealthy. Middle class Americans are especially getting squeezed by rising prices for gas, health care and other things, they said.

“The president just doesn’t get it,” said House Minority Leader Nancy Pelosi of California, the top Democrat in the House. “Many Americans are living paycheck to paycheck and families are struggling to make ends meet.”

© 2013 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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