NEW YORK (Reuters) - Companies hired more workers in July but the gains are too slow to reduce unemployment and spur the economy significantly, reports showed on Wednesday.
The reports come two days before the government's more comprehensive jobs reading for the month and illustrate that while the economy's improving, the jobs market has a long way to go.
U.S. private employers added 42,000 jobs in July, payrolls processor ADP Employer Services reported, slightly more than economists forecast but still a tepid figure.
Separately, the Institute for Supply Management reported increased growth in the services sector in July, while its employment gauge for the sector indicated expansion for only the second time since December 2007.
Employment levels are considered key to a pickup in consumer spending and to boosting overall U.S. economic growth, which has shown signs of weakness in recent months.
"We are going to see subpar job growth for quite some time," said Lindsey Piegza, market analyst, FTN Financial in New York.
"What this means to the average person on Main Street is that there is not a lot of jobs out there. There is still a lot of pressure on consumers and investors," Piegza said.
U.S. stock indexes were moderately higher. U.S. Treasury debt prices slipped and the U.S. dollar rose versus the yen, although investors remained cautious about the economy's path, traders and analysts said.
There have been growing worries that the economy is not expanding rapidly enough to lift the labor market.
The government last Friday reported that U.S. economic growth slowed to 2.4 percent in the second quarter of this year. Christina Romer, chairwoman of the White House Council of Economic Advisers, on Friday had said that "faster growth is needed to bring about substantial reductions in unemployment."
Economists sometimes use the ADP report to narrow down their estimates for the U.S. Labor Department's monthly payrolls numbers, but it is not always accurate in predicting the outcome.
The ADP report of 42,000 job gains was slightly above the median estimate of 40,000 from economists surveyed by Reuters. ADP revised its job gains for June to 19,000, from its previously reported figure of 13,000.
The Labor Department report is expected to show non-farm payrolls fell by 65,000 in July after declining by 125,000 in June as temporary workers hired to conduct the country's decennial census were dismissed.
Given the distortions produced by the census, many economists are looking more closely at the private-sector gauge in the non-farm payrolls report.
Private-sector payrolls are seen rising a modest 90,000 in Friday's data, and the unemployment rate is expected to climb to 9.6 percent, from 9.5 percent in June.
Over the last year, the ADP report has tended to underestimate the private sector job growth in the non-farm payrolls report by about 75,000, according to David Ader, head of government bond strategy at CRT Capital Group in Stamford, Connecticut.
If this average holds, Friday's data could show about a 117,000 increase in private sector payrolls, he said.
Analysts at Deutsche Bank say ADP has under-predicted private nonfarm payrolls in three out of the last four months by an average of 138,000. This would translate into a private payrolls gain of 180,000 in Friday's report.
However, Macroeconomic Advisers LLC chairman Joel Prakken, whose firm jointly developed the ADP report, said he expected only a "modest increase" of 30,000 to 40,000 in private-sector hiring to be reported on Friday.
He also said the outlook for the rest of 2010 was not bright and would be characterized by subpar jobs growth in the private sector.
"I do not expect to see it growing at 200,000 or 300,000 per month, the kind of numbers that you'd like to see at this point in a recovery, and which are really necessary, I think, to help propel the recovery into a stronger, second phase."
A weak report on Friday could also increase speculation that the Federal Reserve will delve into possible ways to lower borrowing costs throughout the economy at next week's policy meeting.
There has already been speculation in the bond market that the U.S. central bank might consider buying Treasury debt in a return to its recent quantitative easing campaign of asset purchases.
In its report on activity in the services sector, which dominates the U.S. economy, the Institute for Supply Management said its services index rose to 54.3 in July from June's 53.8, showing unexpectedly stronger growth. But the reading for backlog orders dipped to 52.0 from 55.5 in June.
A separate report on Wednesday showed the number of planned layoffs at U.S. firms rose 6.0 percent in July, marking the third straight month of increased layoffs, though downsizing activity appears to be slowing.
Employers announced 41,676 planned job cuts last month, up from 39,358 in June, according to the report from consultancy Challenger, Gray & Christmas Inc.
Providing a glimmer of hope for the economy, the demand for U.S. mortgage applications to purchase homes rose last week for a third straight week as interest rates tumbled, the Mortgage Bankers Association said on Wednesday.
Housing was at the epicenter of the recession that began at the end of 2007, which in turn led to the devastation in the job market. Now both are seen key to cementing the recovery.
Additional reporting by Caroline Valetkevitch, Angela Moon, Edith Honan and Ryan Vlastelica; Editing by Leslie Adler