The U.S. economy is like a flywheel: It takes a lot to get it going. Once it starts moving, it can pick up speed pretty quickly.
To see why, look no further than Friday’s jobs report, which offered convincing evidence that the U.S. recovery is finally gaining momentum.
After months of subpar growth in their payrolls, American companies added 243,000 new jobs in January, considerably more than the 150,000 that forecasters expected. That drove the unemployment rate down from 8.5 percent in December to 8.3 percent, extending a rapid decline from 9.1 percent last August.
Since last fall, a series of economic reports have pointed to gradual improvement. But the January employment report tore the cover off the ball.
“It’s very unusual to get an unambiguous jobs report; usually you have a lot of cross currents in the data,” said Mark Zandi, chief economist of Moody’s Analytics. “This is unambiguous. Everything is good.”
The job gains were spread across the economy, from the leisure and hospitality industry, which added 44,000 jobs, to 11,000 new hires by retailers. The battered construction industry added 21,000 jobs, the second straight monthly gain, helped in part by unseasonably warm weather this winter.
The data also included heartening signs of more hiring to come. Employers added more temporary staff and increased the hours of their existing workers. That’s typically a sign that demand has picked up; once companies are convinced the uptick isn’t fleeting, they tend to add more full-time jobs.
January’s drop in the jobless rate also came as more people began looking for work. That’s especially encouraging because, for the rate to go down, a larger number had to have found work.
Many economists have warned that the jobless rate could rise again this year as “discouraged” workers resumed their job hunt; until they land a position, they’re counted as unemployed, which tends to boost the jobless rate until they get hired. That didn't happen in January, which means jobs are being created even faster than discouraged workers are returning to the labor force.
Forecasters were surprised by just how fast the employment data have improved; as of last month, the jobless rate has fallen by eight-tenths of a point in just five months.
“If you go back at look at the cycle after the '90-91 recession and the ‘01 recession, there was this period of no job growth, and then all of sudden it was a like a light switch went on in corporate America,” said Zandi. “It almost feels like that with this report.”
Though the report was good news by itself, the monthly employment data confirmed separate reports showing the U.S. economy getting back on its feet after a long, slow slog.
The economy’s gradual acceleration showed up in a separate report Friday showing ongoing strength in U.S. manufacturing. The Commerce Department said factory orders rose 1.1 percent in December, supported by a rebound in orders for heavy machinery, after a 2.2 percent gain in November. For the year, total orders were up 12.1 percent following a gain of 12.9 percent in 2010, the government reported Friday. Orders had plunged 22.1 percent in the 2009, the year the recession ended.
Some of that surge in December came as companies rushed to place orders before an investment tax credit expired at the end of last year. But the spending on new equipment is expected to continue as companies seek to boost output by upgrading equipment and continuing to look for ways to use technology to boost productivity.
Since the 2007 recession ended, companies have been relying heavily on automation to boost the productivity of their existing workforce to meet rising demand. But the recent reports on productivity show those gains fading, indicating that employers may be exhausting their output gains available from automation, forcing them to add to payrolls.
Service companies grew at the fastest pace in 11 months in January as companies hired more workers to keep up with rising demand. The Institute for Supply Management says its index of non-manufacturing activity jumped to 56.8 percent in January from 53 percent in December. Any reading above 50 indicates expansion. The survey tracks hotels, retailers, financial services firms and construction companies.
As hiring picks up, the pace of layoffs appears to be easing. Initial claims for unemployment insurance have been trending lower. One reason may be that the wave of government job cuts that followed the 2007 recession appears to be slowing. Friday’s jobs report showed that government employment leveled off in January after falling by 276,000 jobs over the past 12 months.
State and local finances have begun to turn around as the improvement in the overall job market and the economy has boosted incomes and has helped sales tax receipts to recover. And though home prices continue falling in many parts of the country, the rapid drop in local property tax receipts has begun to ease.
“The picture has been slices of better news just about everywhere,” said Robert Brusca, chief economist at FAO Economics. “All of this is consistent with improvement.”
The stock market has already begun placing bets that strong growth is taking hold; the Standard & Poor's 500 index has risen 6.5 percent in the last four weeks. Stock prices jumped sharply on Friday’s jobs data; the S&P 500 index added another 1.3 percent, on track for its fifth straight weekly gain.
The surprise drop in the unemployment rate bodes well for the Obama administration, too. The president faces a tough re-election campaign with some 12.8 million Americans still out of work and another 11 million who are working part-time but want a full-time job, or who have given up looking. When those workers are accounted for, the so-called "underemployment" in January stood at 15.1 percent, down just a tenth of a percentage point from December.
But the “headline” jobless rate has fallen to the lowest since February 2009, a month after Obama took office. Economists who have studied the link between the job market and presidential elections say the overall level of unemployment matters less than the pace of improvement in the job market and broader economy.
"There are still far too many Americans who need a job ... but the economy is growing stronger. The recovery is speeding up. And we need to do everything in our power to keep it going," Obama said Friday.
Still, the White House can expect continued withering criticism of its record as the campaign gathers momentum through November. Republican House Majority whip Kevin McCarthy of California Friday called the jobs data “welcome numbers” but said employment gains aren’t coming fast enough.
“There is a better way of going about doing this,” he said. “You've got a Senate sitting on 27 bills out of 30 that would help job creation. So there's a lot of work to be done.”
Most economists were surprised by the jobs data, prompting some to nudge their growth forecast higher for 2012.
But others noted that significant obstacles remain before the U.S. economy gets back up to cruising speed. The housing market remains mired in its worst recession since the 1930s; falling home prices continue to eat into household wealth. The ongoing debt crisis in Europe has forced widespread spending cutbacks that have thrown much of the continent into recession. It’s not at all clear what impact a deeper European recession would have on U.S. growth
“We’re reluctant to get too carried away just yet,” said Paul Dales, senior U.S. economist at Capital Economics. “The economy began both 2010 and 2011 strongly before fading later in each year. As the unwinding of the previous fiscal stimulus starts to bite and as global demand falters, something similar may be on the cards this year.”
CNBC's Steve Liesman takes a look at the correlation between the unemployment rate and participation rate.