Services, private sector jobs up in May

NEW YORK (Reuters) - The U.S. economy showed signs of resilience on Wednesday as the service sector and private employment posted surprising gains for May, but rising inflation pressures cast a shadow over the optimistic figures.

The reports support inflation worries expressed on Tuesday by Federal Reserve Chairman Ben Bernanke and suggest the U.S. central bank may have to turn its focus to reining in price growth from warding off recession.

The U.S. service sector grew in May for a second straight month, according to a report by the Institute for Supply Management that exceeded Wall Street expectations but showed inflation in the sector hit its highest since September 2005.

The ISM reading came after a separate report showed the U.S. private sector added workers in May, defying expectations of a fall.

"We have been getting stronger-than-expected data over the past couple of weeks, both from the manufacturing side and now from the services side," said Michael Pond, Treasury and inflation-linked strategist at Barclays Capital in New York.

"Data overall has been quite inconsistent with calls back in March that the U.S. was entering a prolonged recession."

The Institute for Supply Management said its non-manufacturing index came in at 51.7 in May versus 52.0 in April. That was above the level of 50 that is the dividing line between growth and contraction.

The data suggested the world's largest economy may be coping surprisingly well with the current housing-led downturn, though it is not growing impressively by any means.

In a choppy session on Wall Street, stocks managed to eke out modest gains. The dollar was down slightly against the euro.

U.S. government bonds, which perform better during weak economic times and are hurt by inflation, were lower on the day.

Underpinning concerns with inflation, the ISM prices paid index rose to 77.0 in May, the second-highest reading in the report's 11-year history. It was up from 72.1 in April and the rise also contributed to bond-market losses.

EASY ENOUGH

A report by ADP Employer Services showed private-sector employers added 40,000 jobs in May, easily out-performing economists' median expectation for a drop of 30,000 jobs, according to a Reuters poll.

However, economists may reserve judgment until the government's monthly jobs report on Friday, which they see as more reliable. According to a Reuters poll, analysts expect that to show non-farm payrolls fell by 58,000 in May.

The robust ADP report conflicted with another measure of the jobs market, which showed U.S. companies' planned layoffs rose 15 percent in May from April to the highest monthly total since December 2005.

Planned job cuts in U.S. companies totaled 103,522 in May, up from 90,015 in April, employment consulting firm Challenger, Gray & Christmas Inc reported.

ISM's reading on service sector jobs also showed a less favorable picture, with the employment component of its index falling to 48.7 in May from 50.8 in April.

"ADP has been inaccurate of late, over-predicting payrolls," said Cary Leahey, economist and managing director at Decision Economics in New York.

"That said, the increase of 40,000 jobs in the report will let the market conclude that the May payroll figure due this Friday will be flattish to slightly down, which would be stronger than expected and that explains this mild sell-off in the bond market."

A separate report by the government showed U.S. productivity grew at a slightly faster-than-expected rate during the first quarter, which may calm some of the Federal Reserve's worries over elevated inflation.

U.S. productivity grew at a 2.6 percent annual rate during the first quarter on stronger output than was initially gauged.

Economists polled by Reuters had expected non-farm productivity, which measures the hourly output per worker, to increase at a 2.5 percent pace, compared with a previously estimated 2.2 percent rate.

Compared with the first quarter of 2007, non-farm productivity was up 3.3 percent, the quickest pace in nearly four years.

(Additional Reporting by Alister Bull in Washington; Ellen Freilich and Chris Reese in New York; Editing by Andrea Ricci)