U.S. employers likely maintained a solid pace of hiring in December while raising wages, putting the economy on a path to stronger growth and further interest rate increases from the Federal Reserve this year.
Nonfarm payrolls probably increased by 178,000 jobs last month after a similar rise in November, according to a Reuters survey of economists. The unemployment rate is forecast ticking up to 4.7 percent from a nine-year low of 4.6 percent in November.
Average hourly earnings are expected to rebound with a 0.3 percent rise, benefiting from a calendar quirk, after dipping 0.1 percent in November. That would push the year-on-year increase to 2.8 percent from 2.5 percent in November.
The Labor Department's closely watched employment report on Friday will add to data ranging from housing to manufacturing and auto sales in suggesting that President-elect Donald Trump is inheriting a strong economy from the Obama administration. The employment report will be published at 08:30 a.m. (1330 GMT).
"It will show the economy finished 2016 on a strong note with buoyant activity," said Thomas Costerg, a U.S. economist at Standard Chartered Bank in New York. "It's a stronger starting point for the Trump administration. There is prevailing optimism across the economy which bodes well for 2017."
Trump, who takes over from President Barack Obama on Jan. 20, has pledged to increase spending on the country's aging infrastructure, cut taxes and relax regulations. These measures are expected to boost growth this year.
But the proposed expansionary fiscal policy stance could increase the budget deficit. That, together with faster economic growth and a labor market that is expected to hit full employment this year could raise concerns about the Fed falling behind the curve on interest rate increases.
The U.S. central bank raised its benchmark overnight interest rate last month by 25 basis points to a range of 0.50 percent to 0.75 percent. The Fed forecast three rate hikes this year.
"With the specter of a fiscal stimulus lifting growth and inflation further, there is a risk that the Fed will have to raise interest rates at a faster pace," said Harm Bandholz, chief U.S. economist at UniCredit Research in New York.
December payrolls could, however, come below expectations. First-time applications for unemployment benefits increased between the November and December survey periods, with some economists attributing the rise to cold weather. Also arguing for a slowdown in job growth, service industry employment fell sharply in December from a 13-month high the prior month.
Still, any payrolls print above 100,000 would be considered enough to absorb new entrants into the labor market. Fed Chair Janet Yellen has said the economy needs to create just under 100,000 jobs a month to keep up with growth in the work-age population.
JOB GROWTH SLOWING
Employment growth in the first 11 months of 2016 averaged 180,000 jobs per month, down from an average gain of 229,000 per month in 2015. The slowdown in job growth is consistent with a labor market that is near full employment.
There has been an increase in employers saying they cannot fill vacant positions because they cannot find qualified workers. The skills shortage has been prominent in the construction industry.
"The labor market is tight. Indeed, maybe the biggest complaint that firms have is their ability to find qualified workers," said Joel Naroff, chief economist at Naroff Economic Advisors in Holland, Pennsylvania.
"If that is the case, then hiring will be limited and may actually slow going forward. The option is for wages to rise."
Even as the labor market tightens, there still remains some slack, which is holding back wage growth. The labor force participation rate, or the share of working-age Americans who are employed or at least looking for a job, remains near multi-decade lows. Some of the decline reflects demographic changes.
December's job gains are likely to be broad, though manufacturing employment was probably unchanged after declining for four straight months. Further increases are expected in construction employment, which gained 19,000 jobs in November.
The retail sector, which has shed jobs for two consecutive months, is a wild card. Department store giants Macy's and Kohl's this week reported a drop in holiday sales. Macy's said it planned to cut 10,000 jobs beginning this year.
Department stores have suffered from stiff competition from online rivals including Amazon.com.
Government employment likely increased in December for an eighth straight month. It was boosted by a surge in local government hiring in November, which was likely driven by the Nov. 8 U.S. election.
(Reporting by Lucia Mutikani; Editing by Andrea Ricci)