Companies hired four times more workers in June than in May, strengthening views the economy was starting to escape the doldrums of the first half of the year.
A drop in the number of Americans filing applications for unemployment benefits last week also offered hope for the labor market, although they remain too high to signal robust growth.
Payrolls processor ADP said on Thursday private sector employment increased 157,000 after a modest 36,000 gain in May, a rise more than double economists' expectations.
With gasoline prices falling, automakers cranking up production and the decline in house values moderating, the dark clouds over the U.S. economy are starting to lift.
The jump in private employment was the latest indication the economy was pulling out of its first-half slump, a view bolstered by better-than-expected June sales at retailers, but analysts still see only a modest recovery ahead.
It adds to the sense of relief that much of the slowdown that the economy endured during the first half of the year was due to temporary factors and there is not much threat of a double-dip (recession), said Mark Vitner, an economist at Wells Fargo Securities in Charlotte, North Carolina.
The employment gain, which reflected increases in manufacturing and services jobs, prompted several Wall Street banks to raise their forecasts for the government's closely watched nonfarm payrolls count for June due on Friday.
A Reuters survey conducted last week found that economists were looking for an increase of 90,000 nonfarm jobs after May's meager 54,000 gain. But economists now believe employment probably rose anywhere between 125,000 and 175,000.
ADP has underpredicted the monthly jobs report by 45,000 on average the last four months ... but ADP estimates have won new credibility after their forecast hit May's weak jobs number correctly, said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ in New York.
JOB GAINS ACROSS THE BOARD
Gains in private hiring last month were largely across the board, although construction and financial services' payrolls shrank. Small businesses, those with less than 50 employees, accounted for most of the hiring, adding 88,000 jobs. Large companies added only 10,000 workers in June, according to ADP.
While it is just one month's number, it suggests that maybe what happened was a pause in the economic expansion and as we head into the summer months we're going to pick up some momentum, said Joel Prakken, chairman at Macroeconomic Advisers, which produces the report jointly with ADP.
Economic activity in the first six months of the year was curbed by rising commodity prices and supply chain disruptions following Japan's devastating earthquake in March.
With these factors starting to ease, economists expect both growth and employment to rise in the third quarter.
That is starting to show in initial claims for state unemployment benefits, which dropped 14,000 to 418,000 last week. A shortage of parts from Japan forced some auto makers to bring forward their annual retooling shutdowns from July, keeping initial claims elevated.
Still, claims remained above the 400,000 level that is usually associated with a stable labor market for a 13th straight week. Economists expect them to decline considerably in the weeks ahead as auto assembly plants reopen.
Output and employment are likely to get a little bit of a lift in the third quarter from a rebound in automobile assemblies and a rebound in inventories that would probably carry through most of the second half of the year, said Wells Fargo Securities' Vitner.
Signs of a turnaround in the economy's fortunes were also offered by several U.S. retailers who reported better-than-expected sales gains in June as they lured shoppers with discounts without undercutting revenue.
Macy's Inc, Costco Wholesale Corp, Target Corp and Gap Inc all beat Wall Street estimates.
(Additional reporting by Leah Schnurr in New York; Editing by Andrea Ricci)