U.S. employment likely grew solidly last month, but the jobless rate probably rose from a 2-1/2 year low as improving conditions lured some Americans who had given up looking for work back into the labor market.
The government's closely watched employment report due on Friday should cement views that economic growth accelerated in the fourth quarter after a tepid performance in the first nine months of 2011.
However, the pace of job creation remains too slow to signal a robust recovery is finally under way. Nonfarm payrolls rose 150,000 last month, according to a Reuters survey, after rising 120,000 in November.
Unusually mild weather during the month may have given employment a boost.
While the unemployment rate is expected to edge up to 8.7 percent from 8.6 percent, the tone of the report will likely be strengthened by upward revisions to the payrolls count for October and November, in keeping with a recent trend.
Businesses are beginning to feel a little bit better about the future and are hiring, but we cannot get too excited because 150,000 is the minimum we need to keep the job market stable,
said Sung Won Sohn, an economics professor at California State University Channel Islands in Camarillo, California.
The economy would need even faster job growth over a sustained period to make a noticeable dent in the pool of 24.4 million Americans who remain either out of work or underemployed 2-1/2 years after the end of the 2007-09 recession.
Job growth has averaged 131,000 over the past 11 months and even if payrolls rise as expected in December, employment will still be 6.1 million below its December 2007 level.
With the labor market still far from healthy, the debt crisis in Europe unresolved and tensions over Iran threatening to drive up oil prices, the U.S. economy faces stiff headwinds.
Economists predict the recovery will lose a step early this year after expanding in the fourth quarter at what is expected to be the fastest pace in 1-1/2 years.
This should keep alive the possibility of the Federal Reserve embarking on a third round of asset purchases, or quantitative easing, to spur stronger growth.
We could see QE3 by the middle of the year, said Harm Bandholz, chief U.S. economist at UniCredit Research in New York.
The employment report will offer little comfort to the Obama administration and could provide Republicans with more ammunition to attack the government's handling of the economy.
President Barack Obama's chances of a second term in office could depend on the health of the labor market.
LABOR MARKET TONE IMPROVING
Although the pace of job creation remains mediocre, there is no denying that the market is healing.
Small business hiring is improving and layoffs have subsided, with first-time applications for state unemployment benefits hovering near 3-1/2 year lows.
Over the past several months, the government has consistently revised up earlier payroll counts based on its survey of employers. In addition, the household survey, from which the unemployment rate is derived, has shown an even more vigorous pace of hiring for each of the last four months.
Economists say the Bureau of Labor Statistics may not be picking up jobs created by small companies and new businesses.
The payrolls survey has a hard time picking up smaller employers and births of new start-ups, and that's where we expect to see a lot of job creation, said Stephen Bronars, senior economist at Welch Consulting in Washington.
It's always going to be harder for the BLS to pick up those because they are measuring employment at companies that are included in their survey and those tend to be the bigger, well established companies.
In Friday's report, the government will revise the household series going back five years. Analysts will watch this survey closely to see if the recent improvements will hold.
A broad measure of unemployment that includes people who want to work but have stopped looking and those working only part time but who want more work hit a 2-1/2-year low in November.
GOVERNMENT A DRAG
All the anticipated job gains in December will come from the private sector, where payrolls are seen rising 165,000. Government employment is expect to shrink 15,000, weighed down by budget cuts at state and local governments.
However, the worst of the belt tightening is over and some states have reporting increases in revenue.
In November, a measure of the share of industries that showed job gains during the month fell sharply and economists will be watching to see if it recovers.
Job gains in December are expected to come from construction, where unseasonably mild weather has boosted groundbreaking for new homes. Transportation and warehousing payrolls could also benefit from the mild temperatures.
Manufacturing could post a third consecutive month of job gains, but a moderation in retail employment is expected after recording the biggest increase in seven months in November as retailers geared up for a busy holiday shopping season.
Healthcare and social assistance hiring is expected to pick up after adding the smallest number of jobs in five months in November. Temporary hiring -- seen as a harbinger of future hiring -- is expected to show more gains.
Even though employment probably picked up last month, a modest gain in hourly earnings is likely, indicating that most of the jobs being created are low paying. The high unemployment rate also means wages cannot grow much.
This is a potentially troubling sign for consumer spending, which has been largely supported by a reduction in savings.
The average work week is seen steady at 34.3 hours.
(Editing by Andrea Ricci)