U.S. non-farm job cuts seen smaller in May

By Lucia Mutikani

WASHINGTON (Reuters) - U.S. non-farm payroll jobs likely fell by their smallest amount in seven months in May, pointing to a slackening of the recession, but the unemployment rate looks set to climb to its highest in nearly 26 years, a Reuters poll showed.

The survey of 79 economists forecast employers cut 520,000 jobs last month after reducing payrolls by 539,000 in April, which was the smallest number of jobs cut since October.

The economists expect the unemployment rate to rise to 9.2 percent in May, the highest since September 1983, from 8.9 percent in April. The Labor Department will release the employment report at 8:30 a.m. on Friday.

"It's still a very weak labor market out there. Businesses are reluctant to hire and continue to lay people off to control costs and bring their inventories down," said Stuart Hoffman, chief economist at PNC Financial Services Group in Pittsburgh.

"The decline in jobs is still pretty sharp, but it is not getting deeper."

Analysts reckon non-farm job losses bottomed in January, with the loss of 741,000 jobs. New applications for state unemployment benefits trended lower during late April and for much of May, indicating a slowdown in the pace of job losses.

But with the number of people continuing on benefits after an initial week of aid at record highs throughout April and May, the unemployment rate is predicted to have risen further.

The U.S. economy's housing-led downturn, now in its 18th month, has been brutal on the labor market. As of April, 5.7 million jobs had been lost since the recession began in December 2007. Jobs losses have been widespread, with only the education and health services sectors consistently expanding.

Even the government sector, generally viewed as recession proof, has shed jobs during some months, although it is expected to add at least 60,000 positions in May due to the recruitment of temporary workers in preparation for the 2010 census.

Analysts expect the construction sector, worst hit by the downturn, to show a sharp moderation in the pace of job loss, helped both by warmer weather and the disbursement of some of the government's $787 billion in stimulus money.

May's nonfarm payrolls report could capture some of the job losses related to plant closures by automaker Chrysler after it filed for bankruptcy protection to help it reorganize.

With General Motors' GM.N also planning to shutter plants as part of its reorganization in bankruptcy, economists expect the auto sector to weigh on the labor market for months, exacerbating an already weak employment picture.

"We are still going to see employment reductions for several more months, hopefully slower. It's not going to be before the end of this year or early 2010 before the labor market stabilizes," Brian Bethune, chief U.S. economist at IHS Global Insight in Lexington, Massachusetts.

Even if the recession ends later this year, as widely expected, the unemployment rate will rise well into early 2010. Analysts expect the recovery from the downturn will be too feeble to generate strong employment.

"We think the unemployment rate will peak at 9.8 percent. It's certainly close whether it does exceed 10 percent. Maybe two-thirds of the recession is behind us, but I don't think we will be out the woods for at least eight to nine months," said PNC's Hoffman.