By Jason Lange
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 pick up in hiring came despite tax hikes and sweeping budget cuts earlier in the year. The unemployment rate ticked up a tenth of a point to 7.6 percent, which economists called encouraging because more Americans were 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 one 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, who next gather on June 18-19, have intimated they could be close to reducing their $85 billion in monthly bond purchases even though 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, with the blue chip Dow Jones industrial average closing up nearly 1.4 percent.
The dollar also firmed and yields on U.S. government bonds climbed modestly in anticipation of Fed action later this year.
Of economists polled by Reuters after the data, 42 of 48 said they expected the central bank to trim bond purchases before year-end. Of those, 21 said a reduction would likely occur in the third quarter; 19 specified September.
Philadelphia Federal Reserve Bank President Charles Plosser told Reuters the jobs figures showed that fears were overdone of how hard a tightening of fiscal policy would hit the economy. He repeated his call for the central bank to start easing up on its stimulus sooner rather than later.
"We would all like it to be stronger but there's no reason for us to feel bad about the numbers that came out," he said.
Many analysts expect Washington's austerity drive to slow the economy to a growth pace of around 1.5 percent in the second quarter from a 2.4 percent annual rate in the first quarter.
Budget cuts have prompted hiring freezes at government agencies. Government payrolls declined by 3,000 in May.
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 evidence that U.S. factories have felt the pinch from budget cuts in Europe stemming from the debt crisis. U.S. manufacturing employment declined by 8,000 jobs last month.
"The politics of austerity still hold the world in a vise-like grip," said Richard Trumka, president of the AFL-CIO labor organization.
While total hours worked in the U.S. 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 sign employers might add full-time staff in coming months. The leisure and hospitality industry also showed strength, as did retail and construction.
One strong economic signal was that the jobless rate rose slightly because a flood of people entered the workforce.
In May, 420,000 people entered the workforce, defined as a person either be employed or looking for work. Economists consider that good news because some of the recent drop in the jobless rate had been due to discouraged workers dropping out of the labor pool.
The share of the population in the labor force rose to 63.4 percent.
In another positive sign, the government's household survey, used to calculate the unemployment rate, showed even stronger job growth than the payroll survey of employers. Those figures, however, can be volatile month to month.
(Reporting by Jason Lange; Additional reporting by Chris Reese, Luciana Lopez, Herb Lash and Ellen Freilich in New York, and Jonathan Spicer in Philadelphia; Editing by Neil Stempleman and Tim Ahmann)