El-Erian: High unemployment "headwind" for U.S.

NEW YORK (Reuters) - The United States economy continues to deteriorate, even as the latest payroll figures show employers cut far fewer jobs than forecast last month, Mohamed El-Erian, the chief executive of bond giant Pacific Investment Management Co., said Friday.

"The equity markets are taking comfort from the reduction in the pace of job losses," El-Erian said in an interview. "But the spike in the unemployment rate to 9.4 percent, by impacting consumers' enthusiasm, will act as a headwind to a sharp recovery, as will the back up in bond yields and the increase in oil prices."

The Labor Department's non-farm payrolls report on Friday showed U.S. employers cut 345,000 jobs last month, the fewest since September. However, the unemployment rate of 9.4 percent was the highest since a matching rate in July 1983.

On Friday, the Dow Jones Industrials average was down 2.12 points, or 0.02 percent, at 8,749.23. The Standard & Poor's 500 Index was down 3 points, or 0.32 percent, at 939.48.

At the same time, the bond market also was weaker as the flight to quality trade abated. The yield on the benchmark 10-year note, which moves in the opposite direction to the price, reached as high as 3.90 percent after the release of the data, marking the loftiest level in more than six months. The 30-year long bond briefly traded over two points lower in price after the data, then retraced losses to trade 23/32 lower for a yield of 4.63 percent from 4.58 percent late on Thursday.

El-Erian said the increase in Treasury yields is not only fueled by investors' comfort for riskier securities, but also by the prospects of high issuance on account of large fiscal deficits. He said the markets are becoming sensitive to the stated intention of the Treasury to increase the average maturity of debt from the most vulnerable levels in 25 years.

"The economy is not out of the woods," El-Erian said. "The economic situation is, unfortunately, still deteriorating but at a slower pace."

All told, the Labor Department said the unemployment rate in May rose to 9.4 percent, the highest since a matching rate in July 1983, from 8.9 percent in April.

(Reporting by Jennifer Ablan; Editing by Chizu Nomiyama)