Strong hiring shows depth of expansion

Some economists expect further gains in manufacturing, as well. Recent employment reports have shown improvements in computers, metal fabrication, and machinery industries. At the same time, companies are expected to pick up their pace to replace depleted inventory level.

"If we see a pickup in manufacturing output, we can see a shift from red to black in terms of jobs," says David Heuther, chief economist at the National Association of Manufacturers in Washington. "It's in the tea leaves for some modest increases in employment in the months ahead."

In fact, for the second month in a row, the number of long-term unemployed fell to under 20 percent of the total number out of work. It has been over 20 percent for the past three years. "We are seeing some levels of improvement," says Andrew Stettner, a policy analyst at the National Employment Law Project in New York. "But we're not to the point where everyone who lost good jobs during the recession is able to get good work or decent paid work."

Some of the improvement in jobs comes from retraining programs that are starting to make a difference, says economist John Silvia of Wachovia Securities in Charlotte, N.C. "It's starting to happen in Virginia and North Carolina, bringing down the long-term unemployment that is the result of the globalization of trade over the last 10 years."

Although the job market is tightening, the labor market is not tight enough to cause alarm at the Federal Reserve, which meets to set interest rates Tuesday, economists say. "There is still evidence of slack in the job market," says Lyle Gramley, a consulting economist at the Schwab Washington Research Group. "All we can say is we are getting closer to full employment."

Tuesday, the Fed is expected to raise interest rates for the 10th consecutive time, bumping the Federal Funds rate up one quarter of a percentage point to 3.5 percent. Mr. Gramley, like many other economists, expects the Fed will continue to raise interest rates through the balance of the year. "It requires a lot of vigilance on their part not to allow a buildup of future inflation pressures," says Gramley, a former Fed governor.

Recently, the long-term bond market has factored in some of these changes, and the yield on long-term bonds is up nearly .5 percent. "This will ripple through the economy, particularly housing," says Gramley, who believes this increase will go over well at the Fed, which has been concerned about the economic stimulus of long-term rates.

The Fed governors are likely to discuss changes now taking place in productivity. Chan expects the government to report Tuesday that productivity fell by almost 50 percent from the prior quarter. "That means even if growth is weaker than last year, we can still see an increase in employment," he says.

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