"The economic growth since last year has been very disappointing, largely because of the fiscal drags from tax increases and spending cuts, sequester, but it hasn't translated into weaker jobs growth," said Mark Zandi, chief economist with Moody's Analytics. "Businesses appear to be looking through the fiscal headwinds, which is very encouraging and suggests that as those headwinds fade later this year, GDP growth and jobs growth will accelerate."
Zandi said he is convinced that the second half will rebound to a growth rate of 2.6 percent because of the consistent job growth in the first half, which averaged about 200,000 a month, according to government jobs data. He expects to see 185,000 nonfarm payrolls in July when the government data is released Friday.
Markets reacted mixed, with the dollar moving higher and bonds selling off. Stock futures retreated as traders reacted to a sharp jump in interest rates. The drama was in the bond market, where the 10-year yield jumped to 2.7 percent after the ADP jobs number, before slipping back to 2.66 percent when GDP was released 15 minutes later.
(Read more: US expands at brisk pace in Q2, defying gloom)
When stocks opened, the market moved higher and bond yields remained elevated, with the 10-year flirting with that 2.7 percent level. In late morning trading the Dow moved sharply higher, to a new record.
"The bond market is responding as it should to tightening," said Peter Boockvar, chief market analyst at the Lindsay Group. "The stock market is still deciding between on the one hand, if the job market is better, earnings will be better, and on the other hand, it's tough to ignore this move higher in interest rates."
(Read more: Jumping jobs! Private sector makes big hiring move)
This comes against the backdrop of the Federal Reserve Open Market Committee's meeting, which ends with a statement later Wednesday. While the Fed is not expected to use its 2 p.m. ET statement to deliver any new messages, traders are watching to see if it will say anything about paring back its $85 billion bond purchases. Tapering of the program is widely expected to begin in September if economic data are strong enough.
"This is a conundrum for the Fed: Is the jobs gain going to lead to second half improvement?" Boockvar said. But the risk is a slow-moving economy crimping further jobs gains, and Friday's July jobs report will be key. "If we're getting 200,000 jobs three months in a row, the Fed may lean more toward that and put their chips on a second half recovery," he added.