U.S. job losses slow in May, fueling recovery hopes

By Lucia Mutikani

WASHINGTON (Reuters) - The pace of U.S. job losses slowed sharply last month, the strongest sign to date that the recession is diminishing, even as the unemployment rate hit its highest in nearly 26 years.

The Labor Department said on Friday that U.S. employers cut 345,000 jobs in May, the fewest since September and far less than economists had forecast. They cut 504,000 jobs in April.

However, the unemployment rate raced to 9.4 percent, the highest since July 1983, from 8.9 percent in April, partly because people who had given up looking for work re-entered the labor market, a sign economic confidence was returning.

"It keeps hopes alive for a full recovery in the U.S. economy by the second half. It's a step in the right direction," said John Canally, investment strategist and economist for LPL Financial in Boston.

U.S. stocks pushed higher on the data, while bond prices fell and the dollar rose on the view the Federal Reserve -- the U.S. central bank -- may need to begin withdrawing its extraordinary monetary support from the recession-pummeled economy before year-end.

The relatively small decline in payrolls fell far shy of the 520,000 drop expected by financial markets, sparking market rumors that the government had published incorrect figures, speculation dismissed by Labor Department officials.

Some market participants said the department's adjustments to a model estimating the creation of new ventures and the destruction of old ones had led to an overstatement in employment. But economists said this argument was flawed.

The U.S. recession, now in its 18th month, is the longest since the Great Depression and has wiped out six million jobs, although March and April data were revised to show 82,000 fewer jobs were lost in those months than previously reported.