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* U.S. nonfarm payrolls seen rising 170,000 in May
* Unemployment rate seen steady at 7.5 percent
* Average hourly earnings expected to rise 0.2 percent
* Report to show economy slowly gaining traction
By Jason Lange
WASHINGTON, June 7 (Reuters) - U.S. employers likely stepped up hiring only slightly in May, a sign the economy was growing modestly but not strongly enough to convince the Federal Reserve to scale back the amount of cash it is pumping into the banking system.
The United States probably added 170,000 jobs last month, with the unemployment rate holding steady at a lofty 7.5 percent, according to a Reuters survey of economists.
Following a winter in which the economy seemed to be turning a corner, May would be the third straight month that payrolls outside the farm sector increased by less than 200,000.
"The labor market may not be as strong as we thought," said Kevin Cummins, an economist at UBS in Stamford, Connecticut.
The Labor Department will release the May employment report on Friday at 8:30 a.m. EDT (1230 GMT).
The report could heighten concerns government austerity enacted this year is sapping vigor from the economy, and might dampen speculation the Fed might soon trim bond purchases aimed at lowering interest rates and boosting employment.
Officials at the U.S. central bank have intimated they could be close to tapering bond purchases despite modest economic growth which is not expected to pick up until late in the year when the sting from government spending cuts begins to fade.
Budget cuts have led to hiring freezes at many government agencies, and attrition could be slowly reducing payrolls. Government payrolls are expected to decline by 10,000 in May.
About 4.4 million Americans have been unemployed for more than six months, roughly three million more than pre-recession levels. The longer workers are out of a job, the greater the risk they become essentially unemployable. That could deal lasting damage to the economy and has lent urgency to the Fed's efforts to stimulate growth.
Still, May's expected pace of job growth is right around the average for the 12 months through April. Over that period the jobless rate fell about half a percentage point and the ranks of the long-term unemployed declined by nearly 700,000.
"It's progress that's too slow, but it's progress nonetheless," said Guy Berger, an economist at RBS, also in Stamford.
Fed officials next meet June 18-19 and are widely expected to keep purchasing $85 billion in bonds a month. Many economists don't expect the job market to be strong enough for the Fed to begin scaling back its bond purchases before December.
After barely growing in the last three months of 2012, the U.S. economy expanded at a moderate 2.4 percent annual rate in the first quarter but lost momentum as the quarter drew to a close. Most economists look for growth of around 1.5 percent in the current quarter.
U.S. factories are feeling the pinch from Europe's debt crisis, which has sent a chill over the global economy. The Institute for Supply Management said on Tuesday that U.S. manufacturing activity contracted in May. Manufacturing employment is seen rising by a meager 3,000 jobs last month.
The report is expected to show the length of the average workweek edged higher to 34.5 hours, which could signal demand is strong enough to trigger faster hiring in coming months. Average hourly earnings are seen rising 0.2 percent.
Another indicator of labor market health will come in the share of the population that is either employed or looking for work. Some of the recent drop in the jobless rate has been due to workers leaving the labor force, either because they retired, went back to school or gave up looking for a job.
The labor force participation rate was 63.3 percent in April, holding at a 34-year low for the second straight month. A stabilization of this indicator could point to more healing in the labor market.