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WASHINGTON (Reuters) - Employers stepped up hiring a bit in May in a show of economic resilience that suggests the Federal Reserve could begin to scale back its monetary stimulus later this year.
The United States added 175,000 jobs last month after adding only 149,000 in April, the Labor Department said on Friday.
The pickup in hiring came despite tax hikes and sweeping budget cuts enacted earlier in the year. The unemployment rate ticked a tenth of a point higher to 7.6 percent, but only because more Americans began to hunt for jobs.
"The labor market continues to trudge forward," said Jim Baird, an investment officer for Plante Moran Financial Advisors in Kalamazoo, Michigan.
Even so, the jobless rate remains well above pre-recession levels and May marked the third straight month that U.S. payrolls increased by less than 200,000.
The report showed an economy still in need of the Fed's pedal-to-the-metal support, but which could be strong enough by September for the U.S. central bank to ease up on its bond-buying stimulus, many economists said.
"It's constructive enough to support the notion that bond buying should be curtailed as we go into the late third (or) early fourth quarter," said Ian Lyngen, a bond strategist at CRT Capital Group in Stamford, Connecticut.
Officials at the U.S. central bank have intimated they could be close to reducing the $85 billion in monthly bond purchases despite modest economic growth. The recovery is not expected to pick up steam until late in the year when the sting from government spending cuts begins to fade.
The May job growth figure was just above the median forecast in a Reuters poll of economists, and U.S. stock prices rose sharply on the report, while the dollar firmed. Yields on U.S. government bonds climbed modestly on the view the Fed, which next meets on June 18-19, could begin easing up on its support for the economy this year.
After expanding at a 2.4 percent annual rate in the first three months of the year, many analysts expect the economy to throttle back to a growth pace of just around 1.5 percent in the second quarter due to Washington's austerity drive.
Budget cuts have led to hiring freezes at many government agencies, and attrition could be slowly reducing payrolls. Government payrolls declined by 3,000 in May.
About 4.4 million Americans have been unemployed for more than six months, roughly 3 million more than pre-recession levels. The longer workers are out of a job, the greater the risk they become essentially unemployable. That could deal lasting damage to the economy, a prospect that has lent urgency to the Fed's efforts to stimulate growth.
Still, May's pace of job growth is right around the average for the prior 12 months. Over that period, the jobless rate fell about half a percentage point and the ranks of the long-term unemployed declined by about 1 million people.
"From a worker point of view, of course, you'd like to see a more robust recovery," said Rick Meckler, president of LibertyView Capital Management in Jersey City, New Jersey.
The report added to evidence that U.S. factories are feeling the pinch from Europe's debt crisis, which has sent a chill over the global economy. Manufacturing employment declined by 8,000 jobs last month.
While total hours worked in the economy ticked higher, average hourly earnings were essentially flat. Over the past 12 months, earnings have risen just 2 percent, extending a years-long trend of lackluster income growth.
The biggest job gains were in professional and business services, with temporary jobs up 26,000 in a potential sign employers could expand their full-time staffs in coming months. The leisure and hospitality industry also showed strength, as did the retail and construction sectors.
Paradoxically, one of the strongest economic signals in the report was the slight increase in the jobless rate, which rose because a flood of people entered the workforce.
In order to be part of the workforce, you have to either be employed or looking for work. And in May, 420,000 people entered that category. That's good news because some of the recent drop in the jobless rate has been due to workers dropping out of the labor pool, either because they retired, went back to school or gave up looking for a job.
In another positive sign, the government's household survey - which is used to calculate the unemployment rate - showed even stronger job growth than the payroll survey of employers. The share of the population in the labor force rose to 63.4 percent.
Reporting by Jason Lange; Additional reporting by Luciana Lopez, Herb Lash and Ellen Freilich in New York; Editing by Neil Stempleman and Tim Ahmann