The Federal Reserve looks increasingly likely to start tapering its massive bond-buying program soon after economic data point to an improving job market, the central bank's top priority, economists said.
A slew of economic data Thursday showed slow but steady improvement in employment a day before the Labor Department releases its highly anticipated August jobs report.
"Overall, the US labor market is improving and the pace is decent enough for the Fed to announce tapering at the September 17-18 meeting," said Jennifer Lee of BMO Capital Markets.
Talk of the Fed taper since the plan emerged in May has impacted global financial markets, pushing US interest rates higher and sending capital away from emerging markets.
The US central bank's potential scaleback of its $85 billion a month bond-buying program was expected to dominate the economic agenda of the Group of 20 summit under way in St. Petersburg, Russia.
Data highlighted the continued growth in the world's largest economy. According to the Fed's Beige Book report released Wednesday, growth was "modest to moderate" with employment steady or improved.
Payrolls firm ADP reported private-sector job growth slowed in August but remained in line with the monthly average over the last 12 months.
Businesses added a net 176,000 jobs in August, compared with a revised figure of 198,000 in July.
Mark Zandi, chief economist of Moody's Analytics which helps produce the ADP report, said "it is steady as she goes in the job market."
"There is little evidence that fiscal austerity and health care reform have had a significant impact on the job market," he said.
Weekly unemployment claims, a sign of the pace of layoffs, continued to trend downward at the lowest level in nearly six years.
Initial jobless claims fell by 9,000 to 323,000 in the week ending August 31, the Labor Department reported.
"Claims continue to support the recent pace of employment growth, and the downward trend in unemployment," said Jay Morelock, an economist at FTN Financial.
"If tomorrow's payroll report shows further improvement in the US labor market, expect the Fed to lean on this data as they head into their September meeting, increasing the likelihood tapering will begin in September," Morelock said.
The Fed has made clear that any tapering of the bond-buying program would be dependent on continued broad improvement in the economy.
The services sector, which accounts for most of US economic activity, picked up pace in August, with businesses reporting improving orders and increased hiring, the Institute for Supply Management said Thursday.
The ISM's purchasing managers index for the non-manufacturing sector rose to 58.6, compared with 56.0 in July and 55.2 at the beginning of the year.
"The majority of respondents' comments continue to be mostly positive about business conditions and the direction of the overall economy," the ISM said.
The Labor Department's August jobs report Friday is the most crucial data for the Fed ahead of the Federal Open Market Committee monetary policy meeting this month.
Analysts expect the Labor Department will report the unemployment rate at a four-year low of 7.4 percent last month, unchanged from July's figure.
Jobs growth was projected to increase modestly, to 177,000 jobs, up from a weak 161,000 in July.
"We are becoming more convinced by the day that the jobs numbers are set for a significant shift to the upside. That probably won't happen in tomorrow's August report, but it is coming," said Ian Shepherdson, chief economist at Pantheon Macroeconomics.