With jobs at the top of the U.S. political agenda, private employers reported the smallest payroll decline in nearly two years in January while the vast U.S. services sector grew slightly, data showed on Wednesday.

Signs that the pace of job losses is slowing could ease pressure on the Obama administration as it seeks to regain momentum ahead of Friday's more comprehensive nonfarm payrolls report, expected to show the economy added jobs last month.

Obama is at pains to show evidence that his administration's policies will generate jobs and reduce the country's 10 percent unemployment rate, especially in an election year in which his Democratic Party is attempting to defend majorities in both houses of the U.S. Congress.

After focusing on health-care reform last year, Obama has spent more time of late talking about job creation, particularly as public anger about job losses rises and as Republicans won a Massachusetts Senate seat that had been in Democratic hands for decades.

A positive payrolls report may be just what's needed to spur a stock market rally. It will be positive for Main Street, for Wall Street and for Pennsylvania Avenue, said Michael Woolfolk, currency strategist at BNY Mellon in New York.

A report Wednesday by ADP Employer Services showed the United States lost 22,000 private sector jobs last month, smaller than the 61,000 jobs lost in December and below economists' forecasts of 30,000 jobs lost in January.

January's tally was the lowest since February 2008, according to the ADP report, developed jointly with Macroeconomic Advisers LLC.

The trend continues to get less worse. This is consistent with job growth returning in the United States, said Dave Sloan, senior economist at 4Cast Ltd in New York. I do believe the U.S. economy is now strong enough to create jobs.

On Wall Street, U.S. stocks mostly edged lower on Wednesday, as disappointing results from drug maker Pfizer Inc chilled earlier enthusiasm for the economic data. But government bond prices fell in anticipation of a strong jobs report.

Economists polled by Reuters expect the government jobs report on Friday to show the economy added 5,000 jobs last month after shedding 85,000 in December.

According to the 20 most accurate forecasts, the median estimate is for a gain of 8,000 jobs, which would mark only the second monthly payroll gain since the recession began in 2007.

SERVICES SECTOR GROWS, MORTGAGE DEMAND UP

Also on Wednesday, the Institute for Supply Management said its index of the vast U.S. services sector rose to 50.5 last month from a reading of 49.8 in December. That was a touch below economists' expectation, but slightly above the 50 level that indicates expansion.

Yet, job growth in the services sector, which accounts for the majority of U.S. employment, remained negative.

We are not at the point where service sector jobs are being created, said Gary Thayer, chief macrostrategist at Wells Fargo Advisors in St. Louis.

A report from consultancy Challenger, Gray & Christmas, Inc showed planned layoffs at U.S. companies rose to a five-month high in January. Cuts were concentrated in retail, which the firm said tends to struggle in January, one of the slowest months of the year.

But John Challenger, chief executive of Challenger, Gray & Christmas, said the news is not necessarily a sign of a recession relapse, adding: it is not uncommon to see a surge in job-cut announcements to begin the year.

A separate Mortgage Bankers Association report showed demand for home loans jumped 21 percent to a six-week high last week as borrowers scrambled to lock in mortgage rates ahead of an expected increase.

Some economists expect stronger U.S. growth and the end of various emergency central bank lending and asset purchase programs will put upward pressure on 30-year mortgage rates.

Data last week showed the U.S. economy grew at a 5.7 percent annual rate in the fourth quarter of 2009, after growing by a more modest 2.2 percent in the third quarter.

The outlook for the housing market remains uncertain. Recent data showing a December rise in pending home sales, which are based on signed contracts, after a steep decline the prior month, suggest a rebound would come in fits and starts.

But on the employment front, Marcroeconomic Advisers Chairman Joel Prakken said the ADP report's February edition, due next month, is likely to show employers added jobs.

The climate has really improved quite dramatically, he said. I actually do expect that when we meet next month to discuss the (ADP) report for February's data that we'll be talking about an overall number that actually is positive.

Unemployment