Signs Point to Healthier Job Market in 2014

Is 2014 the year the U.S. job market kicks into higher gear—and stays there?

Recent strength in gross domestic product, industrial production and construction all underpin employment's momentum going into next year. These indicators also support the case that, absent an economic shock, total jobs finally could surpass their prerecession peak by mid-2014.

The labor picture has brightened since the depths of the 2007-09 downturn, but progress has been fitful. In 2013, employers created an average of 189,000 positions a month, picking up the pace in October and November, when they added 200,000 and 203,000 jobs, respectively. In the past two years, the unemployment rate has eased to 7.0% from 8.3%—but much of the decline was due to jobless individuals ceasing to look for work.

The labor market received a vote of confidence from the Federal Reserve, which decided earlier this month to dial down its $85 billion-a-month stimulus program, judging the economy strong enough to get by with less assistance. The central bank in January will lower its purchases to $75 billion and will look to reduce the monthly buys in $10 billion increments at coming meetings.

Fed Chairman Ben Bernanke, at a news conference after the decision, said, "Recent economic indicators have increased our confidence that the job-market gains will continue.…With fiscal restraint likely diminishing and with signs that household spending is picking up, we expect economic growth to be strong enough to support further job gains."

Economists in the most recent Wall Street Journal survey expressed similar optimism, forecasting on average that in 2014 the U.S. will add almost 198,000 jobs a month—the highest estimate since 2005, when the survey first posed the question. Such a pace would put the country on track to return to prerecession job levels before July.

An improving labor market translates into economic growth, through a virtuous cycle of production and spending. As demand increases, employers raise their output to meet it, often by hiring. Workers, in turn, find jobs, and receive wages that can be spent or saved.

That cycle looks to be catching on in the U.S., where brisk consumer and business spending pushed third-quarter growth to a 4.1% annualized pace—above the post-World War II average rate of 3.3%. Consumer confidence, dented by the 16-day federal government shutdown in October, has rallied and industrial production has surpassed its prerecession peak—both favorable signals for hiring.

Pent-up demand will drive job creation in the manufacturing and energy sectors next year, said Ward McCarthy, chief financial economist of Jefferies & Co. He sees consumers and businesses buying goods ranging from washing machines to cars to airplanes, after postponing such big-ticket purchases during the recession and slow recovery that followed. Data company J.D. Power and forecaster LMC Automotive predict U.S. consumers will spend a record amount—more than $34 billion—on new vehicles this month.

Benefits from auto and aircraft purchases have a ripple effect, Mr. McCarthy said, because the two sectors "have many feeder industries, so they both reach pretty deeply into the economy."

Scott Anderson, chief economist of Bank of the West, expects manufacturing in particular to lift growth in business spending to near a 4% pace in 2014, up from the roughly 2.6% rate this year.

"U.S. manufacturing is a lot more competitive globally than it was 10 to 15 years ago," he said, citing productivity growth, the energy boom and the absence of wage pressures that are affecting some emerging markets.

Even the most optimistic forecasters concede that while the employment market is on the right track, it has considerable room to improve. Closing the recession-created hole in the job market is an important milestone, though it still leaves the U.S. more than six million jobs below where it could have been without the downturn. Meanwhile, there still are almost three unemployed people for every job opening. That is down from 6.2 unemployed for every opening at the recession's end, but above the 1.8 ratio at its start.

"One of the most important implications of having a labor market finally reach the expansion phase is that we'll start to absorb the surplus labor that's still sloshing around," Mr. McCarthy said. "It will take some time but at least now there is light at the end of the tunnel to see increases in average hourly earnings."

Average hourly earnings nearly flatlined in the past year, edging up just 2% in November from a year ago, compared with a 3.3% year-over-year increase on the eve of the recession.

The ranks of the long-term unemployed, who have been out of work for at least six months, still top four million, and represent 2.6% of the workforce. Federal jobless benefits to 1.3 million of them ended over the weekend, when a government program expired.

The broader economy, which has helped propel job-market progress, also could prove its undoing. The housing market isn't expected to sustain the pace of recent gains, as rising home prices and interest rates keep some buyers out of the market. The Fed's unwinding of its stimulus program could go awry. A budget deal in Washington has mopped up some fiscal uncertainty, but the government will broach the debt ceiling again in early 2014. Meanwhile, many businesses are unsure how to meet the Affordable Care Act's health-coverage requirements, which go into effect in 2015.

International risks abound, too, such as possible weakness in the euro zone or Japan, or rising energy prices if talks to halt Iran's nuclear program fall apart.

Absent those shocks or other variables, the economic landscape points to a job market on the brink of a long-awaited—and oft-predicted—breakthrough year.

Brenda Cronin