U.S. jobs, service sector data suggest Fed could taper soon

* U.S. service sector growth accelerates in August

* ADP private payrolls rise 176,000 in August

* Jobless claims fall to near five-year low in latest week

* Unit labor costs flat in second quarter

By Jason Lange and Luciana Lopez

WASHINGTON/NEW YORK, Sept 5 (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 (NasdaqGS: ADP - news) 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 Sept. 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.