December's employment report shows an improved hiring environment, but the labor market isn't likely to show much stronger growth for months to come.
Employers have been more willing to add workers, but economists say the expected slowdown in economic growth this year will keep a lid on job gains and the employment picture may even deteriorate.
December’s jobs report showed the creation of a total 200,000 non farm payrolls, after accounting for a decline of 12,000 public sector jobs. The unemployment rate, expected to rise, declined to 8.5 percent. Economists had expected 155,000 new jobs in December.
That compares to a revised 100,000 in November, when the unemployment rate was 8.7 percent, also revised.
"I think the data looked good," said RBS senior economist Michelle Girard. "I think it underscored the fact that the U.S. economy had good momentum heading into 2012. It certainly is consistent with all the other evidence we've seen between claims coming down and the various anecdotal reports on hiring. It has been suggesting the labor market is picking up."
Girard, however, said this report is about as good as it may get this year, and she expects the unemployment rate to come down more slowly and will not fall below 8 percent this year.
"We only have GDP growth of about 2 percent (for the year) because we do think the economy backs off a bit in early 2012," she said. She said it will be like past periods of the recovery, where numbers improve but the economy cannot sustain it.
"We'll kind of hold this pace of 175,000 job gains. It probably means a slower decline in the unemployment rate than what we've seen in he last couple of months," she said.
But, overall, the number was encouraging. "I'm a bit surprised. I thought firms would be more tentative," she said.
Goldman Sachs economist Andrew Tilton, who notes that job advertising and other indicators show an improved hiring picture. Weekly jobless claims, reported at 372,000 Thursday, continue to decline.
“In general, economic growth looks like it’s been a bit better in the last two to three months, so that’s generally correlated with hiring. Weather was very mild so that would tend to help things like construction hiring,” said Tilton. Goldman Sachs economists’ had forecast of 175,000 nonfarm payrolls and were among the highest for the December report.
“I wouldn’t be surprised to get a pretty strong report in January” also, he said earlier this week. “We’ve had low layoffs relative to where we were for the last few years. I would think the January report would be reasonably good and the economic data have been pretty good.”
But that trend could be overtaken by a weakening economy. “We’re reasonably cautious about first-half economic growth,” he said. “On average, for the year, we expect employment growth to be somewhat lower than we expect in this (December) report.”
Mesirow Financial chief economist Diane Swonk also expects the December report to be better than those in some of the coming months, as Europe’s debt crisis continuesand Washington budget and tax talks come back into focus.
“I’m looking at a slowdown in growth as we move into 2012 from the fourth quarter… we’ve gotten an uneven recovery that’s accelerating. That’s kind of like ‘a glass half full,’” she said. “I think we’re going to have some rocky months ahead. I think we’re going to have a slowdown in growth in the first half of the year with Europe still volatile, wreaking havoc on the stock market. Keeping volatility high just keeps people gun shy from hiring more.”
“If we can get between 100,000 and 200,000 (monthly nonfarm payrolls) for the whole year, that would make me extremely happy,” she said.
Economists are mostly dismissing the ADP report for December, which showed that 325,000 private-sector jobs were added. The report is impacted by seasonal factors and has been overinflated in December before. But Swonk said an important element of that report showed that more than of the new jobs were from small business, a trend that was also apparent last month.
“That’s good news and that story continues to grow,” she said. “I think that’s very important, and it’s one we want to keep momentum on, and that’s small business formation … That’s seen a real turn.”
On the negative side, the layoffs of public workers continues and now it’s shifting back to the federal payroll as opposed to state and local government workers.
“We’ve got postal workers. We’ve got veterans. We’ve got defense coming,” she said.
Credit Suisse economist Jonathan Basile had predicted an area that would show improvement in the December report was transportation, reflecting holiday hiring by parcel-delivery services. “They hire massively in December and then they cut that workforce in January,” he said.
The number of couriers and messengers added in December was 42,000 for the month, while the trade and transport sector added a total 90,000. In December, 2010, the number of couriers and messengers payrolls was 46,000 but that number declined by 49,000 in January.
Basile does see a positive in the unemployment claims, and he notes the weekly number is more closely tied to the employment report than it has been in the past. The number has been below 400,000 for the past month.
“When you dip below 360,000, it’s really in solid positive territory for jobs. It really diminishes the chances that jobs cuts are on the table,” he said.
Improvements in the jobs report has already come as the unemployment claims dipped. “It wasn’t the hiring side that was doing the work. It was the firing side,” he said.
More From CNBC.com:
Follow Patti Domm on Twitter: