By Steven C. Johnson and Lucia Mutikani
WASHINGTON (Reuters) - Private employers hired more workers than expected in February and demand for a range of factory goods was solid in January, hopeful signs for the economy as it deals with higher taxes and deep government budget cuts.
The reports on Wednesday suggested economic activity picked up after it stalled in the final three months of 2012.
"They provide some signs that the economy is doing a little bit better," said Michael Strauss, chief economist at Commonfund in Wilton, Connecticut.
Private employers added 198,000 jobs to payrolls last month, the ADP National Employment Report showed, handily beating economists' expectations for an increase of 170,000. There were solid gains in construction, where payrolls rose by 21,000.
Adding to the report's firm tone, January's count was revised to show 23,000 more jobs added than previously reported. The report is jointly developed with Moody's Analytics.
"It feels like underlying job growth continues to improve, and at the current pace, this should be enough to start bringing down unemployment," said Mark Zandi, chief economist at Moody's Analytics. The jobless rate is currently at 7.9 percent.
"In a really rip-roaring economy, we'd be creating closer to 300,000 jobs a month or a bit north of that. So we're not there yet, but we're moving in the right direction," he said.
A separate report from the Commerce Department showed orders for manufactured goods dropped 2 percent, weighed down by a plunge in demand for transportation equipment.
But orders excluding the volatile transportation category increased a healthy 1.3 percent, pointing to underlying strength in a sector that carried the economy out of the 2007-09 recession.
The department also said non-defense capital goods orders excluding aircraft, a closely watched proxy for business spending plans, increased by a more robust 7.2 percent in January instead of 6.3 percent, as it reported last week.
That optimism was also captured in the Federal Reserve's Beige Book, which showed growth improving gradually in January and early February, largely thanks to a broad-based housing market recovery.
DEMAND PICKING UP
The signs of underlying strength in the economy are encouraging, given a recent tightening in fiscal policy.
A 2 percent payroll tax cut ended and tax rates went up for wealthy Americans on January 1, hurting consumer spending. In addition, $85 billion in federal budget cuts, known as the "sequester," started on March 1, and could cut as much as 0.6 percentage point from growth this year.
Stocks on Wall Street ended mostly up on the data, with the Dow Jones industrial average setting a record high for a second day. The dollar rose against a basket of currencies, while prices for U.S. Treasury debt fell for a third straight session.
"Manufacturers and business leaders are telling us that demand has picked up, that they are short of inventory and that they are adding workers," said Andrew Wilkinson, chief economic strategist at Miller Tabak & Co in New York.
The ADP employment data may bode well for the government's more comprehensive labor market report, due on Friday. However, the ADP data has not always been a good predictor of the government report, which captures both public and private jobs.
Also, economists noted that the ADP report made no estimate of any impact from the snowstorm that buried the East Coast during the survey week for February U.S. nonfarm payrolls.
"We believe the payroll count was reduced by around 30,000 because of the weather," said Daniel Silver, an economist at JPMorgan in New York.
According to a Reuters survey of economists, nonfarm payrolls likely increased 160,000 in February, up from a gain of 157,000 in January.
The gains in construction jobs evident in the ADP report underscored recent signs of an acceleration in the housing market recovery. Home prices have been rising since last February and the sector last year contributed to overall U.S. growth for the first time since 2005.
A third report from the Mortgage Bankers Association showed applications for loans to buy homes, a leading indicator of home sales, surged 15 percent last week, snapping three straight weeks of declines.
Economists believe the housing market recovery may just have enough strength to help the economy weather tighter fiscal policy.
Hiring last month was spread evenly across small, medium and large businesses, the ADP report showed. Private sector hiring in January had been skewed heavily toward small businesses.
(Editing by Andrea Ricci and James Dalgleish)