US STOCKS-Wall Street rises on stronger economic data

(Updates to midmorning)

By Walker Simon

NEW YORK, June 4 (Reuters) - U.S. stocks edged higher on Wednesday after data showed unexpected expansion in the sprawling U.S. services sector and a surprise increase in job growth, but gains were capped by worries about the banking sector.

Credit card services company American Express Co (AXP.N) rose 4.2 percent to $46.19 after its chief executive said full-year profit could increase up to 6 percent. The forecast soothed investors as tighter credit conditions cause loan losses to mount at many financial services companies.

A report from ADP Employer Services showed an unexpected gain in private sector employment last month. The data is closely watched as a prelude to Friday's government non-farm payrolls report. A separate report from the Institute for Supply Management showed the U.S. services sector, which makes up the bulk of the economy, expanded for a second-straight month.

The Dow Jones industrial average .DJI was up 43.32 points, or 0.35 percent, at 12,446.17. The Standard & Poor's 500 Index .SPX was up 3.48 points, or 0.25 percent, at 1,381.13. The Nasdaq Composite Index .IXIC was up 13.33 points, or 0.54 percent, at 2,493.81.

"Once you get away from financials, the economy seems to have dodged the bullet," said Jim Awad, chairman of W.P. Stewart and Co. Ltd. in New York, commenting on the stronger than expected ADP and ISM data for May.

But he said it looked like it would take some time to fix the problems at Wall Street bank Lehman Brothers. "That, combined with further problems with other financial firms, should keep pressure on the financial sector," he added.

Shares of Bank of America (BAC.N), the No. 2 U.S. bank, fell 1 percent to $32.32 after Merrill Lynch cut the bank's earnings outlook and price target.

Bank of America will face earnings pressure through 2010, Merrill said, citing its broad exposure to the U.S. consumer and to mortgage-related loans, For details see [ID:nBNG217876]

Shares of Lehman Brothers LEH.N were up 3.3 percent to $31.60 after sinking as much as 6 percent at the market open following a report by the Wall Street Journal. The paper said the investment bank is looking to raise capital overseas and has approached at least one investor in South Korea.

Before the market open, government data showed first-quarter U.S. productivity rose at a slightly faster-than-expected pace, but unit labor costs, a gauge of inflation and profit pressures, also rose more than forecast. (Editing by Kenneth Barry)