Dow jumps to post-2008 high – but economists stress households remain under severe strains and businesses face continued uncertainties
A surprise leap in new US jobs and much stronger than expected news from Britain's dominant services sector have bolstered hopes of a new-year rebound on both sides of the Atlantic.
Stock markets surged as the world's largest economy reported an unexpected fall in unemployment along with buoyant business activity.
The news propelled the Dow Jones industrial average to its highest close since before the 2008 financial crisis. The Dow jumped 156.82 points to 12,862.23, its highest mark since 19 May 2008, about four months before Lehman Brothers investment bank collapsed.
In the UK there was similar upbeat news from a survey suggesting services companies enjoyed their strongest growth in activity for almost a year in January. But economists were quick to cautioned against reading too much into the new-year bounce, stressing that households remained under severe strain and businesses faced continued uncertainties, particularly around the eurozone debt crisis.
Athens is under pressure to wrap up talks on a bond swap and a €130bn (£108bn) bailout to avert a chaotic default, but hopes of an imminent deal faded after eurozone finance ministers put off a meeting expected on Monday to finalise the rescue. It came as Greek unions and employers' associations blocked a critical element of an EU rescue deal, accusing negotiators of crippling the economy with wage cuts and tax rises that will undermine growth.
But in Britain, France and Germany, leading share indices all added more than 1.5% after the closely watched US non-farm payrolls reported the fastest jobs growth in nine months. The 243,000 jobs added in January were well above market expectations of a 150,000 gain. The Llabour department said the jobless rate fell to 8.3%, the lowest for three years, from 8.5% in December.
It was a welcome boost for President Barack Obama, who has been battling stubbornly high unemployment. He said the latest jobs numbers showed the US economy was growing and healing.
"The economy is growing stronger. The recovery is speeding up. And we've got to do everything in our power to keep it going," he said, renewing calls for Congress to extend tax reductions for working Americans.
"Now is not the time for self-inflicted wounds to our economy."
Economists noted the employment gains were spread widely across the economy. "January's payrolls report is unambiguously positive," said Rob Carnell, chief international economist at ING Financial Markets. "At the current rate of improvement, the long-run target for the unemployment rate of about 6.5% will be reached by early to mid-2013."
But Paul Ashworth, chief US economist at Capital Economics, questioned whether the US economy was finally primed for takeoff. "To be honest, we're still sceptical … with housing still in the dumps, fiscal policy being tightened and the eurozone crisis likely to flare up again at any moment, we still think the US will endure another year of weak growth in output and employment," he said.
There were similarly cautious predictions for the UK after a widely followed survey of the services sector recorded a stronger than expected start to the year.
Services companies, which make up more than two-thirds of the economy, were more optimistic about the outlook and enjoyed the strongest growth in new business since last July, according to the Markit/CIPS UK services PMI poll.
Businesses in the sector, which includes hotels and restaurants to banks and transport, hired new workers at the fastest pace for almost four years. The upbeat report cast doubt over whether the Bank of England will resume its quantitative easing programme when it announces its latest policy decisions next week.
Howard Archer, economist at IHS Global Insight, said: "The economy still faces very challenging conditions and is far from out of the economic woods". "Indeed, Relapses in activity remain a very real risk given major headwinds that notably include still pressured consumers, rising unemployment, reduced government spending and the ongoing uncertain eurozone sovereign debt situation."
Survey compilers Markit said the report chimed with its polls from other sectors this week suggesting the UK economy enjoyed a revival in January.
Chris Williamson, Markit's chief economist, said: "The situation is certainly a lot brighter than seen in the final quarter of last year, when the economy contracted 0.2%, and a slide back into recession is now looking increasingly unlikely."
The survey's headline measure of business activity rose to 56 in January, up from 54 in December. That was well above the 50 mark that separates expansion from contraction and beat a forecast for it to drop to 53.5 in a Reuters poll of economists. It was the highest reading for 10 months.
"Much uncertainty persists, but this is nevertheless a far better start to 2012 than almost all were expecting to see," added Williamson.
There were also signs that strains on households had eased slightly as the number of insolvencies fell at the end of last year, although experts warned the improvement could be short lived. Personal insolvencies in England and Wales dropped to 28,973 in the fourth quarter, from 30,219 in the third quarter, the Insolvency Service said. In 2011 there were 119,850 personal insolvencies, down from 135,045 in 2010.