U.S. private payrolls surge on gains in construction, manufacturing

By Lucia Mutikani

WASHINGTON (Reuters) - U.S. private sector job growth recorded its biggest increase in more than a year in February amid a surge in construction and factory hiring, suggesting the economy remains on solid ground despite an apparent further slowdown in the first quarter.

Signs of sustained labor market strength, if confirmed by the U.S. government's closely followed monthly employment report on Friday, could encourage the Federal Reserve to hike interest rates next week.

"I never say 'done deal' when it comes to the Fed, but a strong report would get us pretty close to one," said Joel Naroff, chief economist at Naroff Economic Advisors in Holland, Pennsylvania. "It would reinforce the warning that I have been making that rates could rise faster and go higher than the markets currently anticipate."

The ADP National Employment Report showed on Wednesday that private payrolls grew by 298,000 jobs last month, the largest increase since December 2015. The gain was well above economists' expectations for a 190,000 increase.

Construction payrolls jumped by 66,000 jobs last month, the sector's second largest gain since the ADP series started 15 years ago. The surge likely reflected unseasonably mild weather that kept crews at building sites.

Manufacturing increased by 32,000 jobs last month.

The ADP report, developed with Moody's Analytics, has a poor track record predicting the private payrolls component of the Labor Department's more comprehensive jobs report. Still, some economists raised their February nonfarm payrolls forecasts.

"Taken literally, the data suggest significant upside risk to the employment report on Friday," said Jim O'Sullivan, chief U.S. economist at High Frequency Economics in Valhalla, New York. "However, ADP is far from infallible for signaling the more volatile payrolls data."

Payrolls likely increased by 190,000 jobs in February after rising by 227,000 in January, according to a Reuters survey of economists. The unemployment rate is forecast edging down to 4.7 percent from 4.8 percent in January.

WEAK PRODUCTIVITY

Fed Chair Janet Yellen signaled last week that the U.S. central bank would likely raise rates at its March 14-15 policy meeting.. The Fed raised its benchmark overnight rate in December and has forecast three rate increases for 2017.

Prices of U.S. Treasuries fell on Wednesday, with the yield on the two-year note rising to its highest level since August 2009. The dollar firmed versus a basket of currencies, while stocks on Wall Street were mixed.

The economy grew at a 1.9 percent annualized rate in the fourth quarter, slowing from the third quarter's brisk 3.5 percent pace. Data on trade, consumer, business and construction spending were soft in January.

As a result, the Atlanta Fed is forecasting GDP increasing at a 1.2 percent rate in the first quarter.

In a separate report on Wednesday, the Labor Department said nonfarm productivity, which measures hourly output per worker, rose at an annualized 1.3 percent rate in the final three months of 2016, as it had estimated last month.

Weak productivity suggests it will be hard to significantly boost economic growth. President Donald Trump has pledged to boost annual growth to 4 percent. The economy has not achieved 3 percent annual growth since the 2007-2009 recession ended.

Productivity grew at a 3.3 percent pace in the third quarter. It increased 0.2 percent in 2016, the smallest gain since 2011, after rising 0.9 percent in 2015.

Productivity has risen at an average annual rate of 0.6 percent over the last five years, well below its long-term rate of 2.1 percent from 1947 to 2016.

"The underlying trend in productivity remains disappointing and means higher wages are increasingly weighing on businesses' bottom line," said Gregory Daco, head of U.S. macroeconomics at Oxford Economics in New York.

(Reporting by Lucia Mutikani; Additional reporting by Chuck Mikolajczak in New York; Editing by Paul Simao)