Job growth bolsters recovery confidence

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Surveys showing faster-than-expected jobs growth and a boost for the services sector bolstered confidence that the US economic recovery has shifted to a higher gear.

The strong monthly readings on Wednesday from ADP and the Institute for Supply Management added to a string of encouraging news on the health of the US economy, which has recovered from the recession of 2007-2009 at a sluggish pace but has recently been showing signs of more rapid growth.

The ADP survey signalled that businesses have started to hire new workers more aggressively, a key step towards bringing down the 9.8 per cent unemployment rate.

“It’s clear that the US economy is entering 2011 on a very strong note, with good upward momentum,” said Michelle Girard, an economist at RBS in Connecticut.

“Employment is clearly accelerating and that seems consistent with other data gathered at the end of the year. There are a lot of things that seem promising to us,” said Joel Prakken, chairman of Macroeconomic Advisers in St Louis.

The latest evidence of a more rapid economic expansion caused 10-year Treasury yields to increase from 3.36 per cent to 3.46 per cent in morning trading, as the bond sell-off of the past two months continued.

The dollar rallied and equity indices moved higher, with the S&P 500 index up 0.5 per cent. In minutes from their December 14 policy meeting released this week, Federal Reserve policymakers noted the improved outlook, but judged that the improvement was not sufficient to consider curtailing their plans to support the economy through the purchase of a total $600bn in long-term government bonds by the end of June.

Still, a more rapid acceleration in activity could prompt the central bank to begin reining in the programme.

The private sector added 297,000 jobs in December, up from a revised 92,000 in November and the 11th straight month of expansion, according to ADP. The gain was significantly higher than the 100,000 new jobs that economists had predicted, and bodes well for the more widely followed monthly jobs report from the US government, set to be released on Friday.

The services sector led gains with 270,000 new jobs, the largest monthly rise since the survey began in 2000. The improving health of services businesses – which account for the bulk of US economic activity – was highlighted by the ISM’s non-manufacturing index, which rose to 57.1 in December from 55 in November, surpassing estimates of 55.6 per cent. A reading above 50 indicates growth. The December figure was the 12th consecutive month of growth in the sector, and the most rapid expansion since May 2006.

Executives were “mostly positive about business conditions,” said Anthony Nieves, chair of the ISM non-manufacturing business survey committee, though some warned of growing price pressure. Business activity and new orders grew faster in December, with executives citing increased consumer optimism and demand for new products.

The strong business activity reading “should translate into some sharing of that revenue with the labour side of the economy,” said Jonathan Basile, director of economics at Credit Suisse.

Hiring continued for the fourth straight month, though at a slower rate than in November. But with companies sitting on more cash as business activity increases, employment is likely to pick up, Mr Basile said.

“It’s about ‘show me the money’, and it looks like the service firms have it. They need people to generate the output.”

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