2012.06.01 17:56:30 2nd UPDATE: US Payrolls Post Weak Gain; Manufacturing Slows In May

--May nonfarm payrolls growth of 69,000 jobs is smallest gain in a year --Institute for Supply Management report shows manufacturing sector slowed in May --Consumer spending increased mildly in April; inflation measure held flat (Adds information on employment, manufacturing purchasing managers' index, personal-income and construction-spending reports.) By Jeffrey Sparshott and Eric Morath Of DOW JONES NEWSWIRES WASHINGTON (Dow Jones)--U.S. job growth slowed sharply in May, a sign of a sputtering recovery that may increase pressure on the Federal Reserve to prop up the economy. A separate report showed that the manufacturing sector, a major driver of employment, slowed last month. Nonfarm payrolls grew by a lackluster 69,000 last month, the Labor Department said Friday, the smallest gain in a year. The unemployment rate, obtained by a separate survey of U.S. households, ticked higher by one-tenth of a percentage point to 8.2%, the first increase since June 2011. "This is what a jobless recovery looks like," said Nomura Securities economist Jeffrey Greenberg. Economists surveyed by Dow Jones Newswires had forecast a gain of 155,000 in payrolls and for the jobless rate to remain at April's 8.1%. Compounding an already-weak report, payroll gains in March and April were revised down by a combined 49,000. Nonfarm payrolls increased by 77,000 in April and 143,000 in March. Meanwhile, a Friday report from the Institute for Supply Management showed the U.S. manufacturing sector grew less than expected in May. The ISM's manufacturing purchasing managers' index last month fell to 53.5 from 54.8 in April. Economists had expected the May PMI to slip but only to 53.9. A reading above 50 indicates expanding activity. While growing more slowly, the factory sector has expanded for 34 consecutive months. The index's decline was due primarily to weaker final demand for products and an end to the inventory buildup seen since the later part of 2011, said Steven A. Wood, chief economist with Insight Economics LLC. Nearly three years after the recession ended, the economy has failed to gain traction amid broad uncertainty related to Europe's debt crisis, the potential for steep U.S. tax increases and spending cuts next year, and signs of slower growth in developing countries. The U.S. economy grew only 1.9% in the first quarter of the year and unemployment has remained stubbornly high. Federal Reserve officials have said that they expect only gradual improvement in the U.S. labor market for the rest of this year. The central bank is forecasting an unemployment rate somewhere between 7.8% and 8.0% by the end of 2012. The poor May jobs report is likely to renew focus on the Fed's unconventional measures to help the recovery. A report from the Commerce Department on Friday showed prices moderated in April after an increase in energy costs drove up overall inflation earlier in the year. This could give the central bank more leeway to provide stimulus to the economy should the employment situation worsen. The price index for personal consumption expenditures rose 1.8% year-over-year in April--the lowest level in 14 months. On a monthly basis, the index held flat. The same report showed consumer spending increased 0.3% in April from the prior month, while incomes rose 0.2%. A $400 billion Fed bond-buying program, meant to reduce long-term interest rates, ends this month. Known as "Operation Twist," the effort has extended the maturity of the central bank's holdings of Treasury securities and reinvested in other expiring securities. The May employment report "reinforces our call that Operation Twist will be extended at this meeting," said David Semmens, senior U.S. economist at Standard Chartered. "We may even see more talk of the need for more quantitative easing." At the least, Friday's report likely ensures the central bank won't veer from its plan to keep short-term interest rates low until late 2014. On June 7, Fed Chairman Ben Bernanke is scheduled to testify before a Congressional panel on the economic outlook, and the central bank's policy-making committee next meets June 19-20. The Labor Department said private companies accounted for all of the growth in payrolls, adding 82,000 jobs in May. Governments, meanwhile, cut payrolls by 13,000. Similarly, a second Commerce Department report showed that the private sector drove an increase in construction spending in April, even as federal and local governments slashed spending further. Construction spending increased by 0.3% in April to a seasonally adjusted annual rate of $820.66 billion. Total private-sector spending on construction increased 1.2% in April to $549,670, led by a 2.8% gain in private residential building. However, public construction slid 1.4% to $270.99 billion, its lowest level since December 2006. -By Jeffrey Sparshott and Eric Morath, Dow Jones Newswires; 202-862-9291; jeffrey.sparshott@dowjones.com --Andrew Ackerman, Tom Barkley, Kathleen Madigan and Ryan Tracy contributed to this article. (END) Dow Jones Newswires June 01, 2012 11:56 ET (15:56 GMT)