The U.S. labor market likely started the new year on an upbeat note, but this month’s job growth probably won’t be strong enough to put much of a dent in the stubbornly high unemployment rate, economists said in anticipation of the January nonfarm payrolls report due Friday. Meanwhile, the annual benchmark revision may show that payrolls rose by more than currently believed last year.

“We started the year on a pretty solid footing,” Steve Blitz, chief economist at ITG Investment Research, said. “I think the report is going to be a little bit better than what most people think.”

Economists expect nonfarm payrolls to show a respectable, but hardly spectacular, gain of 160,000, after a 155,000 December increase. Projections provided by 90 economists polled by Thomson Reuters ranged from a gain of 75,000 jobs to a gain of 200,000. Over the past two years, employment growth averaged 153,000 per month.

Hiring in the construction sector, boosted temporarily by the combined effects of the clean-up operation after Superstorm Sandy and the unseasonably warm winter weather, probably slowed this month. The 30,000 construction jobs added in December is unlikely to be repeated in January.

The Labor Department will release the January jobs data on Friday at 8:30 a.m. EST.

A 160,000 increase in payroll employment in January would maintain the pickup in jobs growth seen in the second half of last year without being strong enough to significantly reduce the unemployment rate from December’s 7.8 percent.

After two months of gains, economists expect a softening in wages with average hourly earnings only increasing 0.2 percent, following a 0.3 percent gain in December. The average workweek is expected to hold at 34.5.

Population And Benchmark Revisions                                                                  

There are a few special factors this month, including the final benchmark revision to payrolls and the population adjustment to the household survey.

Every January, the Bureau of Labor Statistics introduces the latest population estimates into the household survey, which can affect the level of the household measure of employment and the size of the labor force. In prior years, the population adjustment has created big swings in the labor force, which biased the unemployment rate.

Since the Labor Department does not revise the historical figures, this generates a discontinuity between December and January. “January’s monthly changes in household employment and the labor force should be interpreted with care,” Paul Dales, senior U.S. economist at UK-based Capital Economics, said in a note to clients.

At the same time, the BLS will incorporate the results of the annual benchmark revision to past payroll figures. The revision is based on a universal count of unemployment insurance records, which, as all employers are required by law to file, are more accurate than the normal monthly survey covering roughly a third of all employees. The revision should correct for any deficiencies in the normal monthly survey, such as the failure to accurately pick up the birth and death of firms or any distortions within the sample, according to Dales.

The preliminary estimate issued by the BLS last September, but not yet incorporated into the data, suggested that the level of nonfarm payrolls in the year to March 2012 will be revised up by a fairly hefty 386,000, or approximately 32,000 per month.

The data between March and December of last year will also be revised, but the BLS has not provided any guidance on this.

Manufacturing Treading Water

Businesses in the manufacturing sector probably added 10,000 new jobs this month, after adding 25,000 jobs in December, economists surveyed by Thomson Reuters predicted.

“For some time, we’ve seen companies with the ability to spend more on capital expenditure and additional hiring, but it seems that the motive to increase either of those activity has been somewhat lacking throughout the recovery,” Christopher Petrosino, managing director of the quantitative strategies group at Manning & Napier, said.

For companies that do want to hire, they are having a hard time finding the right employees because of the skills gap. Since the 1990s, overtime hours increased to keep up with the decreasing supply of skilled laborers, but these workers can only be stretched so thin.

According to a survey by Deloitte and the Manufacturing Institute, 83 percent of manufacturing companies indicated a moderate to serious shortage of skilled production workers. Moreover, 69 percent expect the skilled labor shortage to grow over the next three to five years as current skilled workers near retirement.

A median 5 percent of jobs were left unfilled due to lack of qualified candidates, amounting to about 600,000 jobs, according to the survey.

“We are starting to see anecdotal evidence of manufacturing expansion in the U.S., but it takes time for improvements to show up in the jobs number,” Michael Knolla, a research analyst at Manning & Napier, which oversees about $40 billion in assets, said.

Companies such as Agrium Inc. (NYSE:AGU), CF Industries Holdings, Inc. (NYSE:CF), Rentech, Inc. (NYSEAMEX:RTK) and Potash Corp./Saskatchewan (NYSE:POT) have recently announced brownfield expansion plans.

“When those brownfield operations actually come to life, then the real big hiring comes as we get to the next stage where we see greenfield investments,” Knolla said. “We’ve seen some greenfield announcements, but those can take two to three years to actually flow through.”

As typically happens at the start of a new year, the Institute of Supply Management on Monday revised the seasonal factors for the data contained in its closely watched manufacturing survey. For December, the revised manufacturing purchasing managers’ index now stands at 50.2, lower than the originally reported 50.7.

The ISM is scheduled to release its January factory survey this Friday, which is expected to show a reading of 50.5.

Caterpillar Inc. (NYSE:CAT), the world's largest maker of construction and mining equipment, said Monday it expects the first half of 2013 to be weaker than the first half of 2012, with better growth in the second half.

Federal Reserve To Stay Dovish

Having just initiated an expansion of quantitative easing, or QE, in December, it is unlikely that there will be any substantive policy changes at this week's federal open market committee meeting.

Recently, Fed officials have sounded differing opinions on how long it should continue buying bonds, with some leaning toward ending the purchases before the end of the year. Some Fed officials are worried about the potential for "financial instability" if the Fed's balance sheet grows too large.

Since the financial crisis of 2008 and 2009, the central bank’s portfolio has more than tripled and has topped $3 trillion for the first time as the Fed continued with its easy-money policy.

HSBC chief U.S. economist Kevin Logan expects the current open-ended program of $85 billion in asset purchases per month to be reaffirmed along with the new thresholds of 6.5 percent unemployment and 2.5 percent inflation for an end to the exceptionally low fed funds rate.

Now the committee can sit back and wait to see the effects of these policy changes on the economy. “It will probably take at least six months to see any substantive changes, and so policy is now most likely on hold for the next several months,” Logan said in a note to clients.

The conditionality for a change in the fed funds rate is clear: The thresholds are 6.5 percent unemployment and projected inflation of less than 2.5 percent. The conditions for a change in the QE policy are not so clear. In December, the committee said it would continue its purchases of Treasury and agency mortgage-backed securities as long as the outlook for the labor market does not improve "substantially."

Logan believes that "substantially" means, among other things, a gain of at least 200,000 new payroll jobs per month for six months. Payroll employment increased an average of 160,000 jobs per month for the past six months.

“I don’t see any dramatic change in policy this year, simply because I just don’t see any dramatic shift in the economic data to push [policy makers] in that direction,” Blitz said.