By Jason Lange and Luciana Lopez
WASHINGTON/NEW YORK (Reuters) - Solid U.S. jobs and service sector data on Thursday bolstered views the Federal Reserve could start slowing its bond-buying program as soon as this month, but plunging orders for factory goods highlighted uncertainty around the economic outlook.
The pace of growth in the U.S. services sector accelerated in August to its fastest pace in almost eight years, an industry report showed on Thursday.
The Institute for Supply Management (ISM) said its services index rose to 58.6, its highest since December 2005, from 56 in July. The reading handily topped economists' consensus expectations for 55 and beat the high end of forecasts.
"Services represent approximately 85 percent of the economy, so the continued expansion of the sector is critical for the continuation of the overall economy recovery," wrote Thomas Simons, a money market economist at Jefferies & Co in New York, in a note to clients.
In addition, U.S. private employers added 176,000 jobs in August, and new jobless claims last week fell to a near five-year low.
The data could help convince the Fed that the world's biggest economy is ready to stand on its own, able to withstand a pullback by policymakers on $85 billion per month in buying of Treasuries and mortgage-backed securities.
Yields on U.S. Treasuries jumped to 25-month highs backed views about slower Fed buying. Stocks were on track for a third straight day of gains and the dollar notched multi-week peaks against the yen and the euro, fueled by the U.S. economic data.
Nevertheless, new orders for U.S. factory goods dropped in July by the most in four months, a worrisome sign for economic growth in the third quarter.
The Commerce Department said new orders for manufactured goods dropped 2.4 percent. Analysts polled by Reuters had expected an even sharper decline.
While the U.S. economy has generally gathered momentum in recent months, the recovery has been uneven, with occasionally mixed data clouding the outlook for Fed policy.
The number of planned layoffs at U.S. firms surged in August to their highest in half a year, consultants Challenger, Gray & Christmas, Inc said.
Still, data suggest the labor market - key for Fed decisions - is seeing a slow but steady comeback.
The 176,000 private jobs in the August report from payrolls processor Automatic Data Processing and Moody's Analytics came in just below the 180,000 expected in a Reuters poll, although analysts said the report was good enough to keep Fed tapering views on track.
"(It's) enough to reinforce expectations that the Fed will begin to taper its asset purchases," said Paul Ashworth, an economist at Capital Economics in Toronto.
JOBS HOLDING UP
Separately, the Labor Department said the number of Americans filing new claims for jobless benefits fell 9,000 last week to 323,000, below the 330,000 expected in a Reuters poll.
The four-week moving average for new claims fell to its lowest level since October 2007, before the 2007-09 recession began. This measure, which is closely followed because it irons out week-to-week volatility, dipped 3,000 to 328,500.
All told, the U.S. jobs market has held up better than expected in the face of healthcare reform and government spending cuts, Moody's Analytics' chief economist Mark Zandi said in a conference call after the ADP report.
The data come one day before the U.S. government's report on August non-farm payrolls, which investors will scour in hopes of divining the future direction of the Fed's massive asset-buying program.
The Fed is now weighing when to pull back on its so-called quantitative easing program. Views it could slow its buying as soon as its September 17-18 meeting have sent Treasury yields soaring more than 100 basis points in recent months.
Policymakers say their decisions will depend on data showing the health of the world's biggest economy. The Fed wants to see the jobless rate closer to 6.5 percent from 7.4 percent currently.
Economists in a Reuters poll, however, see the August unemployment rate remaining flat and stagnant prices could also worry the Fed.
A separate Labor Department report showed U.S. labor costs were flat in the second quarter, a sign of minimal inflationary pressures, which could fan concerns inflation is too low.
At the same time, the report showed productivity rose 2.3 percent during the period, which was a bigger gain than expected and gave a more hopeful sign for the outlook for wages.
Over the last year, inflation has been well below the U.S. Federal Reserve's 2 percent target, which has led some analysts to expect the Fed could hold back on winding down its bond buys.
Extremely low inflation is scary because it raises the risk an economic shock - say, a meltdown in Europe or in emerging markets - could tip the economy into a downward spiral of falling prices and wages known as deflation.
(Reporting by Luciana Lopez in New York and Jason Lange in Washington; Editing by Krista Hughes)
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