January surprise: U.S. job growth tops forecasts

Hiring in the U.S. surged last month, while worker wages grew at their fastest rate since 2008.

Employers added 257,000 jobs in January, the Labor Department said Friday, topping forecasts of around 228,000. The nation's unemployment rate inched up to 5.7 percent, from 5.6 percent. That suggests the improving labor picture is encouraging more people to look for a job.

In another positive sign, the government revised up its estimate for November job growth to 423,000, the most in 17 years. Total job gains in December were also revised higher, to 329,000, from 252,000.

"The economy is doing so well that it has created more than 1 million additional jobs in the last three months alone," said Paul Ashworth, chief U.S. economist with Capital Economics, in a research note. "That's the strongest pace of job growth we've seen since 1997."

Hiring was steady across a range of industries last month, including, retail, construction, health care, manufacturing and other sectors.

But the most encouraging number in the government's latest labor report: Average hourly earnings in January rose 0.5 percent, or 12 cents. Slow wage growth throughout the recovery has hindered consumer spending. The January jump in pay -- if sustained in future months -- suggests the labor market is tightening. That should further boost wages and drive personal consumption. Consumer spending accounts for roughly two-thirds of economic activity in the U.S.

"Wage growth will accelerate in 2015 as the labor market continues to tighten and firms raise wages to retain and attract workers," predicted Gus Faucher, senior economist with PNC Financial Services Group, in a note ahead of the latest labor numbers.

The labor market strengthened significantly in 2014, as employers added nearly 3 million jobs, the most since 1999. Payroll gains averaged 246,000 per month last year, up from 194,000 in 2013. And rising consumer confidence and plunging gas prices since last summer have fueled healthy personal spending.

Other factors continue to restrain growth. Although wages are edging up, hourly earnings over the last 12 months rose only 2.2 percent, notes Jim Baird, chief investment officer with Plante Moran Financial Advisors. After previous recessions, wages typically grew between 3 or 4 percent.

A deceleration in Europe and Asia, coupled with a stronger dollar, is also hurting demand for U.S. products overseas and leading American consumers to buy more foreign goods. That is pushing up the country's trade deficit, which is expected to weigh on first-quarter growth.

Although the U.S. is performing better than many countries, the domestic economy continues to bear the scars of the housing crash. Millions of families still report being under severe financial strain, while 1 in 5 children in America rely on food stamps.

And while unemployment has fallen sharply over the last year, the low labor participation rate -- the share of Americans who have jobs or are looking for work -- suggests that many people haven't benefited from stronger hiring, or have stopped hunting for a job altogether.

Despite those challenges, economists expect the economy to continue its slow climb back from the abyss. Forecasters project U.S. gross domestic product to expand at least 3 percent this year, which would be an improvement on 2.4 percent and 1.9 percent in 2014 and 2013, respectively.

Many experts also think unemployment will resume its downward drift, taking the jobless rate down to what economists call its "natural" rate of 5 percent to 5.5 percent.

A tightening labor market could persuade the Federal Reserve to start hiking interest rates by mid-year, economists said following today's employment report.