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* Private payrolls rise 204,000 in August, miss expectations
* Services sector activity gauge highest since January 2008
* Trade deficit narrows to $40.5 billion in July
By Lucia Mutikani
WASHINGTON, Sept 4 U.S. companies hired workers at a steady clip in August and services sector activity accelerated to 6-1/2-year high, assurances the economy was on track for sturdy growth in the third quarter.
That view was reinforced by other data on Thursday showing only a slight increase in the number of Americans filing for unemployment benefits last week and a narrowing in the trade deficit to its lowest point in six months in July.
"The story line of underlying growth momentum at least being sustained and at best picking up this quarter has more or less been confirmed," said Millan Mulraine, deputy chief economist at TD Securities in New York.
Payrolls processing firm ADP said private-sector payrolls increased by 204,000 last month after rising by 212,000 in July, with gains spread across a range of industries.
While the report was a bit softer than economists expected, it marked the fifth straight month of gains above 200,000 and augured well for a broader report on hiring that the government will release on Friday.
In a separate report, the Institute for Supply Management said its services index rose to 59.6 last month, the highest reading since its inception in January 2008, from 58.7 in July.
A reading above 50 indicates expansion in the vast services sectors. A subindex of service industry jobs showed strong growth for the sixth straight month.
The government on Friday is expected to report that nonfarm payrolls increased by 225,000 last month after advancing by 209,000 in July, according to a Reuters survey of economists.
The upbeat jobs market picture was also captured in another report from the Labor Department that showed initial claims for state unemployment benefits last week held at levels consistent with a tightening of labor market conditions.
"The broad evidence is that the labor market continues to improve at a very solid rate," said John Ryding, chief economist at RDQ Economics in New York.
The jobs market is being closely monitored for clues as to when the Federal Reserve will start tightening monetary policy, having kept its benchmark overnight lending rate near zero since December 2008. Economists expect an interest rate increase sometime in the first half of 2015.
TRADE DEFICIT NARROWS
The services report added to bullish auto sales and manufacturing data in suggesting a solid base for growth, as did the report on international trade.
The Commerce Department said the U.S. trade deficit fell 0.6 percent to $40.5 billion in July, its smallest size since January. When adjusted for inflation, it reached its narrowest point since December 2013, prompting economists to raise their estimates for third-quarter gross domestic product.
Goldman Sachs lifted its GDP growth forecast by two-tenths of a percentage point to a 3.2 percent annual rate, while Morgan Stanley raised its estimate to a 3.3 percent pace from 3.0 percent.
The fairly upbeat data coupled with an interest rate cut from the European Central Bank helped to buoy U.S. stocks, while the dollar rallied to a 14-month high against the euro. U.S. Treasury debt prices were trading lower.
In July, exports rose 0.9 percent to a record high, with automobile and non-petroleum exports surging to all-time highs.
That eclipsed a 0.7 percent rebound in imports. The rise in imports, which was driven by food and autos, is a sign of underlying strength in domestic demand.
Another month of declines in petroleum imports on the back of the U.S. energy boom pushed the petroleum deficit to its lowest level since May 2009.
But the politically sensitive trade gap with China was the highest on record. (Reporting by Lucia Mutikani; Additional reporting by Ryan Vlastelica and Caroline Valetkevitch in New York; Editing by Tim Ahmann and Paul Simao)