Published: Aug 04, 2010 3:07 PM EDT
Updated: Aug 05, 2010 4:30 AM EDT

WASHINGTON (AP) — Job prospects are looking just a little brighter.

The service sector, which makes up 80 percent of the economy, grew for the seventh month in a row, and state aid to preserve jobs for tens of thousands of teachers and other public employees cleared a key hurdle in Congress on Wednesday.

Of course, the job market still has a long way to go. A key employment report due out Friday is expected to show the nation actually lost jobs in July, mostly because of temporary census work that came to an end.

"The good news is that the economy is still moving forward, but the bad news is that it is moving at a fairly moderate rate," said Sal Guatieri, senior economist at BMO Capital Markets.

"At least we have enough underlying strength in the economy to keep pushing us forward," he said.

Wednesday's news seemed to satisfy investors. The Dow Jones industrial average rose 55 points in afternoon trading, flirting with the 10,700 level for the first time since May.

Wall Street's reaction is not so much a sign of confidence in the recovery as a sigh of relief. Weeks of dismal reports have suggested the rebound had slowed.

"The barrage of bad news in recent weeks has lowered the bar sufficiently to leave markets happy with any report that doesn't add to the array of deteriorating indicators," said Mike England, an economist at Action Economics.

The most encouraging development was a private trade group's report that the nation's broad service sector expanded in July. The Institute for Supply Management's index, which covers everything from homebuilders to medical transcriptionists to Google, rose to 54.3.

A reading of 50 or higher on the service index signals growth, and it hasn't been below that threshold since 2009. June's reading was 53.8, and economists were expecting a drop to 53 for July.

The service sector depends heavily on consumer spending, and that has been weak since the recession began in 2007. Americans are saving more and resisting major spending sprees, a trend that the latest government reports confirmed this week.

Economists also saw positive news on Capitol Hill on Wednesday. The Senate overcame a Republican filibuster and was poised to pass a $26 billion aid package to help states and local school boards cope with their budget problems.

The measure and an extension of long-term jobless benefits that was approved last month would help sustain the recovery, economists said. But they don't expect any real change until employers start hiring at a faster pace.

Friday's jobs report is unlikely to show that. The latest forecasts show the economy lost 65,000 jobs in July, much of it because of the lingering effect of temporary census jobs that have ended.

The report should show private-sector payrolls rose by about 100,000 in July, predicted Ryan Wang, an economist with HSBC. That would be about the same pace of job growth so far this year on average.

The service report offered some promise. Businesses reported that new orders, an indicator of future business, grew faster. And one measure of hiring expectations also rose in July for only the second time since December 2007.

Earlier this week, ISM said the nation's manufacturing sector had grown for the 12th consecutive month.

Some businesses are finally seeing strong growth return. Cognizant Technology Solutions Corp., a New Jersey company that provides consulting and information technology outsourcing, posted big gains in profit and revenue in the second quarter as corporate customers restarted projects that had been on hold during the recession.

It said it added 3,200 jobs to its payrolls during the quarter, an increase in its work force of nearly 4 percent.

Still, many other companies remain wary. Those businesses responding to ISM's survey showed "cautious optimism about business conditions," said Anthony Nieves, who oversees the ISM's service sector survey.

Office supply chain OfficeMax Inc. said Tuesday that it expected small declines in sales for the year because the economic recovery is slower than company executives had expected.

And grocer Safeway Inc. in July lowered its profit forecast for the year, saying it doesn't expect supermarket prices to increase until the fourth quarter because shoppers remain frugal.

Of the 18 industries surveyed by ISM, 13 reported growth in July, led by real estate and the arts and entertainment sectors. Construction and utilities were the biggest of four industries saying they shrank last month. Companies providing professional and scientific services said they saw no net change in growth.