Stronger jobs report seen encouraging Fed taper
The surprise jump in private sector payroll data reinforces that hiring is improving and has traders speculating that the government's December employment report could be more robust than economists expect.
ADP reported private sector job growth of 238,000 for the month of December, including a surge of 48,000 jobs in construction, the best in that sector since 2006.
Reuters reports that the consensus among economists for Friday's December employment report is 196,000 nonfarm payrolls—down from 203,000 actual in November—with the unemployment rate unchanged at 7 percent.
The ADP report supports the view that the Fed will proceed with the planned $10 billion taper of its $85 billion monthly bond-buying program this month and further reduce purchases at subsequent meetings. The number is viewed as a guide but not an accurate barometer for Friday's government payroll data—an important metric for the Fed in its policy making.
(Read more: Private sector job growth is off and running)
"How fast they ultimately taper will be data dependent, and if we keep getting these upside surprises it could be faster than people think," said Diane Swonk, chief economist at Mesirow Financial. She expects the Fed to wind down its bond buying by August.
Gabe Mann, Treasury strategist at RBS, said the bond market was already looking for a December jobs number as high as 215,000 and that the ADP number could push up those expectations.
In fact, Goldman Sachs economists bumped their consensus forecast of 175,000 for December nonfarm payrolls to 200,000 after the ADP report. In a note, they cited the report as well as improvement in the ISM nonmanufacturing employment index for the increase.
JPMorgan economists said the ADP report put their 215,000 nonfarm payroll forecast at risk, but they left the estimate unchanged. Citigroup economists raised their forecast to 165,000 from 125,000, and on the other end of the spectrum, Deutsche Bank economists boosted their forecast to 250,000 from 200,000.
The National Federation of Independent Business later said its small business survey showed owners increased employment by an average of 0.24 workers per firm in December, the best reading since February, 2006.
The Goldman economists and others have noted that ADP has not yet proved itself to be a reliable metric for jobs growth, but it is getting more attention since changing its methodology in 2012. Its report also showed a revision in November, to 229,000 from 215,000. Economists had expected ADP to report 200,000 jobs for December.
Swonk said she had been looking for 200,000 nonfarm payrolls and was not revising her forecast.
"I think we're going to have a good composition again," she said. "I think we're going to have some manufacturing gains. The ISM did surprise on the upside."
Economists are beginning to voice more confidence in job growth and the performance of the economy in general.
"The last two quarters of the year could be the best two quarters back-to-back since 2005,and that was before the trade data," Swonk said. "Growth easily exceeded 3.5 percent. At first we thought it was an inventory fluke—it was more than a fluke."
Third-quarter GDP growth has been revised to 4.1 percent. Fourth-quarter GDP will be reported Jan. 30.
"It's the trend in employment that matters., and the trends have been good," Swonk said. "What matters to me is not the number but also that the revisions have been good. In an economy you tend to miss stuff over time. You miss turning points. These numbers aren't very good at picking up turning points. They only catch it in the revisions."
She believes there was a turning point in the summer that was further masked by the impact of the government shutdown in October.
Dean Maki, Barclays chief U.S. economist, also is not changing his view about Friday's jobs report but is not as positive as Swonk, as he said temporary increases in unemployment claims in December show job growth weakened from November's level.
"We're at 175,000, and what's curious in the ADP report is the 48,000 in construction. I'm skeptical— whether it's some strange weather, seasonal adjustment affect," he said. " I have a hard time believing that was the trend in job growth in December. We'll see what the labor report did or didn't do on that front. It looks out of place."
Peter Boockvar, chief market analyst with Lindsey Group, said the ADP number and the coming jobs report will probably confirm the Fed's tapering.
"To me, that's the headwind for 2014," he said. "The Fed's no crutch, and when [stocks] are up 30 percent in one year, you have to believe you've priced in the good news."
—By CNBC's Patti Domm. Follow her on Twitter