By Jason Lange
WASHINGTON (Reuters) - Companies added staff in August at the fastest clip in five months and a gauge of employment in the service sector also improved, upbeat signals for a struggling labor market.
Another report on Thursday showed new claims for jobless benefits fell last week to the lowest level in a month.
The data is the latest to hint the U.S. economy is gaining a bit of steam, and it raised chances the government's more comprehensive jobs report on Friday could be stronger than economists expect.
But the data did not alter the view that economic growth is too weak to make a big dent in the still-high unemployment rate, keeping alive chances the Federal Reserve could launch a new bond buying program as soon as next week.
"We wouldn't expect this improvement to persuade the Fed to hold fire next week," said Paul Ashworth, an economist with Capital Economics in Toronto.
The weak U.S. economy is center stage in the presidential election campaign.
President Barack Obama, who is looking very vulnerable ahead of Election Day on November 6, will lay out his economic vision in a high-stakes speech on Thursday night closing out the Democratic Party's national convention.
Analysts say any bounce he might get could be quashed by a weak jobs report on Friday.
In a sign that report might bring relatively good news, payrolls processor ADP said firms expanded by 201,000 workers last month, the most since March and well above economists' expectations.
Even so, economists think the government's report will show only modest hiring, with nonfarm payrolls expected to rise 125,000. The unemployment rate is seen holding at 8.3 percent.
"The unemployment rate will continue to come down at a painfully slow rate," said Eric Stein, a portfolio manager at Eaton Vance Investment Advisors in Boston.
Housing and retail sales data also have suggested economic growth picked up early in the third quarter after clocking a 1.7 percent annual growth rate between April and June. However, business spending is weakening and inflation is slowing.
Analysts sometimes use the ADP data to fine-tune their forecasts for the government's payrolls report. However, the ADP figures are not always accurate in predicting the outcome.
Over the last three months, the report has overstated gains in private payrolls by about 45,000 per month, according to analysts at Credit Suisse. Still, JPMorgan economist Daniel Silver said the ADP figures for August increase the chances the payroll report could be stronger than expected.
The economic data and a European Central Bank decision to launch a new and potentially unlimited bond-buying program to fight the euro zone's debt crisis propelled U.S. stocks sharply higher while U.S. government debt prices fell.
The euro zone crisis is one of the darker clouds hanging over the U.S. recovery. The American economy is also threatened by Washington's so-called fiscal cliff -- the $500 billion or so in tax hikes and government spending cuts that will kick in at the start of the year absent congressional action.
In a separate report, the Labor Department said initial claims for state unemployment benefits dropped 12,000 last week to a seasonally adjusted 365,000. It was the first decrease and the lowest level since the week ended August 4.
The state of the labor market, particularly the unemployment rate, could determine whether the Fed offers additional monetary stimulus at its September 12-13 policy meeting.
Fed officials will also weigh another report released on Thursday that showed the pace of growth in the massive U.S. services sector rose in August on a rebound in employment and exports, though a measure of new orders declined.
The Institute for Supply Management said its services index jumped to 53.7 last month from 52.6 in July, as service sector employment hit its highest level since April.
A reading above 50 indicates expansion in the sector. A separate ISM gauge of business in the manufacturing sector earlier this week showed contraction in August for the third straight month.
In another positive sign for the labor market, the number of planned layoffs at U.S. companies dropped for a third straight month in August, hitting a 20-month low, according to a report from consultants Challenger, Gray & Christmas Inc.
(Additional reporting by Jonathan Spicer, Chris Reese and Ellen Freilich in New York; Editing by Andrea Ricci and Dan Grebler)