Brighter U.S. economy makes Fed tapering more likely

WASHINGTON — The economy is showing strength as summer nears a close — a trend that's raising the likelihood the Federal Reserve will slow its bond buying later this month.

The steady improvement is also lifting hopes for today's report on job growth last month. The August gain is expected to nearly match the year's monthly average of 192,000 jobs.

On Thursday, reports showed that services companies are stepping up hiring and that a dwindling number of people are losing jobs. Those figures follow reports of stronger auto sales and faster expansion by U.S. factories.

This year's solid job growth, along with a sharp drop in layoffs, has helped lower the unemployment rate to 7.4 percent from 7.9 percent in January. It also means more Americans are earning paychecks and likely will boost consumer spending in coming months.

Analysts predict that employers added 177,000 jobs in August. "People are finding work, and they have more money to spend," said Drew Matus, an economist at UBS.

The improved jobs picture is a key reason most economists expect the Fed to announce later this month that it will scale back its bond buying. The Fed's $85 billion a month in Treasury and mortgage bond purchases have helped keep home-loan and other borrowing rates ultra-low to encourage consumers and businesses to borrow and spend more.

Chairman Ben Bernanke has said the Fed could begin slowing its bond purchases by year end if the economy continued to strengthen and end the purchases by mid-2014. At its policy meeting Sept. 17-18, the Fed will debate whether to taper its monthly purchases and, if so, by how much.

Key data released in the past week have bolstered the position of those Fed officials who argue that the economy is healthy enough to withstand tapering:

  • U.S. services firms, which employ about 90 percent of the U.S. workforce, expanded last month at their fastest pace in nearly eight years, according to a report Thursday from the Institute for Supply Management. Sales and new orders rose. Service companies also hired at the fastest pace in six months. The institute's index of service sector growth has jumped 5.8 points in the past two months to 58.6 — the biggest two-month increase since it began in 1997. Service firms include retailers, banks, construction companies and hotels.
  • A four-week average of applications for U.S. unemployment benefits has fallen in the past month to its lowest point since October 2007 — two months before the Great Recession officially began. The trend shows that employers are laying off fewer and fewer workers.
  • Survey results reported Thursday by payroll provider ADP found that American businesses added 176,000 jobs in August. That was slightly less than the 198,000 added in July but close to the past year's average monthly gain.
  • U.S. factories grew last month at their strongest pace in more than two years, according to the ISM's index of manufacturing growth. A measure of orders soared to its highest level since April 2011, a sign that factory output could grow further in coming months.


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