The last week of summer could prove to be anything but relaxing for stock investors worried about the economy, with the crucial August jobs report on the agenda.

Stocks eked out a second week of gains by Friday's close. Last week's economic data, including a report showing new home sales rising at their fastest pace in almost a year, helped to keep indexes in positive territory.

But employment has been among the weakest parts of the U.S. economy, keeping investors on edge about the sustainability of an economic recovery.

We've been on a sugar high right now and sooner or later, the market will run out of candy. And this is what's going to happen on Friday with the jobs data, said Michael Kane, chief executive officer of Hedgeable, an online portfolio management service, in New York.

Stronger-than-expected second-quarter earnings, which helped push the Standard & Poor's 500 Index <.SPX> up 11.5 percent since July 1, have just about come to an end.

And analysts noted that while overall volumes have been light, trading was dominated last week by a few troubled financial companies, including insurer American International Group Inc .

Economists polled by Reuters forecast job losses of 225,000 for August, which would be a slight improvement from 247,000 lost in July. But they expect the unemployment rate to rise to 9.5 percent in August from last month's 9.4 percent.

Along with the government's report on nonfarm payrolls, the economic calendar will be packed this week, with data due from the Institute for Supply Management on U.S. manufacturing and the service sector, as well as minutes from the Federal Reserve's most recent meeting.

For the week, the Dow Jones industrial average <.DJI> rose 0.4 percent, the Standard & Poor's 500 Index <.SPX> advanced 0.3 percent and the Nasdaq Composite Index <.IXIC> gained 0.4 percent.


AIG's stock jumped 27 percent on Thursday, a day after its new chief executive said in a Reuters interview he did not favor a fire sale of its assets. For the week, AIG's stock was up a whopping 53 percent.

Shares of mortgage lenders Fannie Mae and Freddie Mac also soared during the week.

Markets have been driven by low-quality stocks and, more recently, by speculative financial stocks, said Subodh Kumar, chief investment strategist at Subodh Kumar & Associates, in Toronto.

Compared to six months ago, I'm paying more attention now to the sustainability of the recovery. When I look at that aspect and what companies are saying, the sense I get is the market is a little bit ahead of itself, he said.

The jobs report is expected on Friday, but it follows a slew of other economic indicators earlier in the week.

On Monday, the Chicago Purchasing Managers Index for August will be released. That will give investors a preview of what to expect for the ISM reports on manufacturing and the service sector later in the week.

On Tuesday, the Institute for Supply Management releases its manufacturing index for August. The Reuters poll forecasts a reading of 50.5, up from 48.9 for the previous month.

The markets are now looking for validation from the ISM manufacturing number, said John Praveen, chief investment strategist at Prudential International Investments Advisers LLC in Newark, New Jersey.

If we get a number above 50, the markets will react positively. But if it is a disappointment, then there will probably be a bout of profit taking, he said.

Construction spending figures for July, pending home sales for July and August car sales also are due on Tuesday.

Data on July factory orders is expected on Wednesday morning, with minutes of the Federal Reserve's August 11-12 policy-setting meeting set for release that afternoon.

On Thursday, the ISM's non-manufacturing index, which gives a reading on the U.S. service sector, will be released. The Reuters poll calls for an August reading of 48, up from July's index at 46.4.


But Friday's jobs data could overshadow the rest of the week's numbers.

This will set up for what I think will be a September to remember, Kane said.

The biggest eye-popping number to me from last month's report is we still have 5 million people that are long-term unemployed. Until this number goes down dramatically, I don't see how the market can trade any higher.

Stronger-than-expected second-quarter earnings underpinned the market for much of July and August.

Just a handful of S&P 500 companies are left to report results. Second-quarter earnings now are projected to drop 27.3 percent from a year ago, according to Thomson Reuters data. That compares with a forecast for a 36 percent decline from the year-earlier quarter at the start of the earnings period, and a 35.5 percent drop in the year's first quarter from the same period in 2008.

Some 73 percent of the companies that reported results beat estimates -- well above the 61 percent average for a typical quarter, Thomson Reuters data showed.

(Additional reporting by Leah Schnurr; Editing by Jan Paschal)