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Economists Expecting Faster Jobs Growth Now

Economists are now expecting more rapid improvement in the unemployment rate, despite mixed messages in Friday's snow-blown jobs report.

Stocks have rallied and the dollar strengthened as a better economic view buoyed financial markets Monday. The better data also spurred a move higher in Treasury rates—and once again, has markets questioning the Fed's easing programs.

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Over the weekend, Goldman Sachs economists trimmed their outlook to an unemployment rate of 8.6 percent by the end of the year, down from 9.0 percent. They now see 2012 at 8 percent, down from 8.3 percent.

The government reported January's unemployment rate at 9.0 percent, compared to the 9.5 percent expected by economists, and down from the December 9.4 percent.

Some of the improvement was easily explained by the increase in workers giving up the job search, but economists believe snowy weather also played a role in depressing other aspects of the employment report, including the very weak non-farm payroll growth of 36,000. That number was more than 100,000 below what was expected.

Economists think weather was a significant factor, because some 866,000 workers reported they were unable to get to work because of it.

Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi, expects the unemployment rate to fall to 8.2 percent by year end. "I think we probably were already looking for some pretty good improvement anyway...A very fast speed of recovery would be roughly 1 percent a year. If we're 9.0 percent at the end of January, you're talking about 8.0 percent by the end of the year," he said.

Rupkey said the government made a change to account for population control in the data.

"The population control showed the drop in the unemployment rate was real, based on the way they do it. It wasn't just smoke and mirrors. We think the snow impact was roughly 800,000," Rupkey said. "...Something suppressed the payroll number and I do think it was probably the weather, and that, and the unemployment rate suggests it was a strong report."

Another factor feeding the rosier feeling about the economy were last week's ISM manufacturing and services surveys, both surprisingly stronger than expected. Some economists said the 60.8 level for the manufacturing survey would signal 5 percent GDP if it continues.

"I've got growth at 4.7 percent in the first quarter, but I'd be leery of going much higher than that. In terms of positive news, I think the ISM surveys were definitely highlights. Aside from the payroll numbers, there hasn't been a ton of evidence to suggest the weather was a big negative in January. Both the auto sales and chain store sales came in pretty different," said Pierpont Securities chief U.S. economist Stephen Stanley.

Many economists believe the economy is on the verge of adding a large number of jobs. However, "at some point, the labor force is going to expand very rapidly," Stanley said, noting that when that happens, the unemployment rate could see upward pressure from a growing number of workers actively looking for jobs.

The Fed View

The Fed View

Stanley said he expects the unemployment rate to be at 8.5 percent by year-end. "I think that's meaningful. When the unemployment rate was at 9.8 percent, people were saying where the Fed should stop easing," and that level was 9 percent, he said.

"Maybe the Fed doesn't think that way, and they don't have a target on the employment rate at which they won't ease," he said.

Goldman economists, in a note, said there's a chance the lower unemployment rate will impact the Fed's policy course, but they still believe the Fed will not hike rates until 2013.

"Our Fed rate view is certainly becoming a closer call. The lower unemployment rate makes the message from standard Fed 'reaction functions' more mixed than a few months ago, and a modest upward adjustment to the core inflation path would reinforce this," they wrote.

"In practice, it is hard to know whether one should adjust for the stance of fiscal policy, especially at a time when the positive effects of fiscal policy are already behind us and the stance is likely to turn tighter in coming years. But our estimated rules are starting to send a less unambiguous message that rate hikes should be delayed until 2013, and it would not be too surprising if the market tested our 'low for long' more in coming weeks," they wrote.

Bond yields are once again defying the Fed's easing efforts, as traders say the move is related to inflation worries and the better data. The Fed is in the midst of its "quantitative easing" program, under which it plans to buy $600 billion in Treasury securities by the end of the second quarter.

Yields have moved dramatically in the past week, even as the Fed buys securities. The yield on the 2-year rose to 0.785 percent, and the 10-year was at 3.674, its highest level in nearly 10 months. The Fed funds futures market is pricing in a hike of up to a half percent by January 2012, and a quarter percent in each of the next two quarters.

"There's concern in the market that the Fed might move sooner rather than later," said Jefferies Treasury strategist John Spinello, adding he doesn't think the market's testing the Fed yet. Jefferies does not expect the Fed to move on rates until 2012.

Rupkey says growth may end up not being as strong as some expect. He sees first quarter growth of 3.5 percent. "I'd be careful of 4 percent plus. Inventories are supposed to swing around.. We would have had 4 percent last quarter, if it wasn't for government spending going down," he said.

"One of the most important parts, consumer spending, I don't know if that's going to be there with the same speed..I think snow and gas prices might have taken a little bit off. I love the strong economy story, and I'd be the first to embrace 4 percent plus, but I think it's a stretch, so I'd take it slow," he said.

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