Service sector growing at fastest pace in 5 years; factories going full bore

As this worker at a Volvo truck assembly plant in Dublin, Va., will attest, factories across the country are cranking out plenty of products. Factory orders rose in December for the fifth time in the past six months, the Commerce Department said.

WASHINGTON -- Activity at manufacturing and service companies has reached a level not seen since before the recession, suggesting a stronger year for hiring.

Some economists are even hopeful that today's employment report may be better than first thought, based on new economic data reported Thursday.

The service sector, which employs nearly 90 percent of the U.S. work force, is expanding at the fastest pace in five years. Factories are cranking out goods, retail sales are up, and many companies are nearing the point where they can no longer expand without more employees.

"Rising output along with a broader trend of slowing productivity should translate into a faster pace of hiring," said Joseph LaVorgna, an economist at Deutsche Bank.

Harsh winter weather that interrupted economic activity along the East Coast last month may temper January's employment gains. Heavy snow caused some companies, particularly those in construction but also in manufacturing, to suspend work. That likely resulted in temporary layoffs.

Most economists are sticking with their forecast of 146,000 net jobs added last month.

Still, Thursday's data suggest that the economy is gaining momentum, and job growth is the next logical step.

"Firms are beginning to say, 'Wait a minute, we're beginning to see enough increases in sales ... and we've exhausted our productivity gains,' " Federal Reserve Chairman Ben Bernanke said Thursday in a speech at the National Press Club in Washington.

The latest evidence came Thursday when the Institute for Supply Management reported its service sector index grew in January at the fastest pace in five years. The private trade group's index covers a wide swath of employers, from retailers to health care companies to construction firms.

Last month's reading of 59.4 was the highest since August 2005 and marked the 14th straight month of growth. Any reading above 50 indicates expansion.

The trade group said this week that factory activity in January expanded at the fastest pace in nearly seven years.

The ISM's factory and services reports showed that order backlogs are growing. That gives companies more certainty that sales will keep rising.

And ISM's services employment index rose in January to its highest level since May 2006, while the employment gauge in the manufacturing report also jumped.

Both point to more hiring by employers.

"It's that backlog of orders that gives businesses the confidence to go out and hire more workers," said Mark Vitner, an economist at Wells Fargo Securities in Charlotte.

Another positive sign for hiring is fewer people applied for unemployment benefits last week, reversing a spike from the previous week largely caused by harsh winter weather.

Applications fell to 415,000, the Labor Department said. That resumes a downward trend that took shape late last year and gave rise to hopes that employers would step up hiring.

Bernanke called that a "pretty good number" and predicted that "pretty soon" there would be some reports of stronger job creation.

Applications are well below their peak of 651,000, reached in March 2009, when the economy was deep in recession.

Fewer than 425,000 people applying for benefits is consistent with modest job growth. But applications would need to fall consistently below 375,000 to signal a likely decline in the unemployment rate.

Also Thursday, the Commerce Department said that U.S. factory orders rose in December. Orders were pushed up by demand from businesses for machinery and communications equipment. Orders have now risen in five of the past six months.

And productivity -- the level of output per hour worked -- rose 2.6 percent in the final three months of last year, Labor reported.

That's slightly higher than the previous quarter. Still, the trend in productivity growth has been declining. That indicates employers may need to step up hiring soon if they want to expand.

Employers will likely create a net 2.2 million jobs this year, according to a survey of economists taken last month by The Associated Press. That's double the number of jobs generated in 2010.