12/29/2011 05:00 EST | Updated 02/28/2012 05:12 EST

US: Modest economic growth, fewer layoffs points to steady hiring gains next year

WASHINGTON - The long-suffering U.S. job market is ending the year better off than it began.

The number of people applying for unemployment benefits each week has dropped by 10 per cent since January. The unemployment rate, 8.6 per cent in November, is at its lowest level in nearly three years.

Factory output is rising, business owners say they're more optimistic about hiring and consumer confidence has jumped to its highest level since April. Even the beleaguered housing market is looking slightly better.

"We are ending the year on an up note," says Joel Naroff, president of Naroff Economic Advisors.

Still, 25 million Americans remain out of work or unable to find full-time jobs. Most analysts forecast a stronger economy and job growth in 2012 — and rule out a second recession — but they caution that could change if Europe's debt crisis worsens or consumers pull back on spending.

On Thursday, the Labor Department said the number of people applying for unemployment benefits last week rose 15,000 to 381,000. But the four-week average, a less volatile measure, dropped to 375,000 — the lowest level since June 2008.

When applications for unemployment benefits consistently fall below 375,000, economists consider it a reasonable sign that hiring is rising enough to push the unemployment rate lower. The four-week average has remained below 400,000 for seven weeks, the longest stretch since April.

A mildly positive report on housing also came out on Thursday. The National Association of Realtors said the number of people who signed contracts to buy homes rose in November to its highest level in a year and a half.

The association sought to temper enthusiasm by noting that the number of cancelled contracts is also on the rise. But financial markets seized on the good news in both reports.

"The recovery in the labour market is maintaining its momentum," says Michael Gapen, an economist at Barclays Capital.

That's noteworthy for an economy faced with a debt crisis in Europe and, as recently as last summer, scattered predictions of a second recession at home.

There was plenty of reason for gloom. A political standoff over the federal borrowing limit brought the United States to the brink of default and cost the nation its top-drawer credit rating.

Most analysts now say another recession is unlikely.

The economy likely grew at an annual rate of 3 per cent or more in the final three months of this year, analysts say. That would top the 1.8 per cent growth rate in the July-September quarter, and the 0.9 per cent growth rate in the first half of the year.

Employers have added an average of 143,000 net jobs a month from September through November. That's almost double the pace for the previous three months. Although it's below the pace from the first quarter of 2011,

Next year should be even better for hiring. The Associated Press surveyed 36 economists this month who said they expect the economy to generate an average of about 175,000 jobs per month in 2012. That's almost double the pace for the previous three months, but not as high as job growth in the first quarter of the year.

Job listings website says its revenue has more than doubled in the past year as companies spend more on recruiting. CEO Paul Forster says the healthcare, energy and information-technology sectors have the greatest increase in job openings.

More small businesses plan to hire than at any time in three years, a trade group said earlier this month. And a separate private-sector survey found more companies are planning to add workers in the first quarter of next year than at any time since 2008.

Consumers are also growing more confident. The Conference Board said Tuesday that its consumer confidence index rose to 64.5 in December, the highest reading since April.

Still, the economy and job market remain vulnerable to setbacks.

Economists view Europe as the biggest threat to the global economy in 2012. Europe is expected to fall into recession as banks reduce lending and countries cut spending and raise taxes in response to a simmering government-debt crisis.

In the worst case, a government default could destabilize the eurozone financial system and trigger a global panic.

Economists are also concerned that consumer spending in the U.S. could taper off if wages — which did not keep up with inflation in 2011 — do not rise faster or if families decide to purchase less on credit.

In November, the unemployment rate fell to 8.6 per cent from 9 per cent to its lowest level since March 2009. About half that decline was attributed to the 315,000 people who gave up looking for work. When people stop looking for a job, the government no longer counts them as unemployed.

Economists surveyed by the AP predict the unemployment rate will fall to 8.4 per cent by Election Day.

About 7.2 million people are receiving unemployment benefits. Congress agreed last week to keep the emergency benefits that half of them depend on for another two months, instead of letting them lapse at the end of this year.