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updated 6/5/2009 6:51:59 PM ET 2009-06-05T22:51:59

Employers throttled back on layoffs in May and cut the fewest jobs in any month since the financial crisis erupted last fall — raising the brightest hope yet that an economic recovery will take hold later this year.

But with companies still reluctant to hire, the nation’s jobless rate rose to a quarter-century high of 9.4 percent, and it likely will keep rising into 2010, possibly within striking distance of its post-World War II peak of 10.8 percent.

The economy shed 345,000 jobs in May, the Labor Department said Friday — half what it was losing in a month at the start of the year. But the report also underscored how hard it has been for America’s 14.5 million unemployed to find new jobs.

“Less bad, yes,” Ian Shepherdson, chief U.S. economist at High Frequency Economics, said, summarizing the economy. “Good, no.”

Companies probably won’t ramp up hiring until they feel sure a recovery is here to stay. Still, considering the damage the recession has wrought — 6 million jobs lost since December 2007 — it was encouraging that employers cut far fewer jobs in May.

The 345,000 jobs lost was down sharply from 504,000 in April, and an even bigger improvement over the average of nearly 700,000 jobs lost monthly during the first quarter of this year.

“The light at the end of the tunnel just got a lot brighter,” said Nigel Gault, chief U.S. economist at IHS Global Insight.

But not so bright that economists expect more employers to start hiring again this year. Economists expect the pace of layoffs to keep tapering off, but they don’t think the economy will begin to create jobs steadily until late next year at the earliest.

“Payrolls are learning to crawl but far from walking,” said Michael Feroli, economist at JPMorgan Economics.

Stocks rallied on the better-than-expected news, but then surrendered most of the gains. The Dow Jones industrial average made a brief foray into positive territory for 2009, then pulled back to close up about 13 points at 8,763.13.

The job losses was the fewest since September and the fourth straight month in which the pace of layoffs slowed. In another heartening note, job losses for March and April turned out to be 82,000 less than the government had reported.

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“This tide is turning,” said Richard Yamarone, economist at Argus Research. “We expect this trend of slower job loss to continue throughout the year.”

With no place for the out-of-work to land, the unemployment rate bolted to 9.4 percent from 8.9 percent in April. It was the highest rate since August 1983.

Hundreds of thousands of people, perhaps feeling more confident about their job prospects, streamed back into the labor force last month looking for work. That was a factor in the jobless rate’s rise, economists said.

Labor Secretary Hilda Solis called the uptick in unemployment “unacceptable” and pledged to bring it down by helping the unemployed get new skills or training.

Including laid-off workers who have given up looking for new jobs or have settled for part-time work, the so-called underemployment rate would be 16.4 percent in May, the highest on record dating to 1994.

And the number of people out of work six months or more rose to nearly 4 million in May, a record and triple the total from when the recession began.

Dan Blatt, 37, who found a retail job in January after being laid off in October, is one of the lucky few. “I’d be frantic if I didn’t have anything now,” he said while attending a job fair in New York and looking for something even better.

To cut costs and perhaps avoid imposing further layoffs, employers trimmed workers’ hours in May. The average work week fell to 33.1 hours, the lowest on record dating to 1964.

Federal Reserve Chairman Ben Bernanke repeated his prediction this week that the recession will end this year, but again warned that any recovery will be gradual.

Against that backdrop, many economists say the jobless rate will hit 10 percent by the end of this year and will keep rising into 2010. Some economists think it could near 11 percent. The highest since World War II was 10.8 percent at the end of 1982.

“Let me be very clear: A lower job-rate loss is not our goal,” Vice President Joe Biden said. “‘Less bad’ is not how we’re going to measure success.”

Biden said he will join Obama on Monday in seeking to put more juice into the president’s stimulus effort, including higher spending on public works projects. Biden did not provide details.

Solis and some economists credited the stimulus with helping to reduce layoffs in May. But other analysts said the benefits of the stimulus wouldn’t really kick in until later this year or more likely next year.

The construction industry saw particular improvement in May, losing 59,000 jobs compared with 108,000 in April. Retailers eliminated 17,500, down from 36,500. Financial activities axed 30,000, down from 45,000.

But factories cut 156,000 jobs in May, slightly more than in April. The government, adding workers for the 2010 Census, reduced its employment by 7,000 after bulking up by 92,000 in April.

Education, health care, leisure and hospitality were among the industries adding jobs.

The Fed says unemployment will remain elevated into 2011, with a tepid economic recovery. The job market may not return to normal — meaning a roughly 5 percent unemployment rate — until 2013, economists say.

Still, evidence is mounting that the recession is letting up, with fresh signs emerging earlier this week. The number of people drawing continuing unemployment benefits dipped for the first time in 20 weeks, and first-time claims also fell. Builders are boosting spending on construction projects, and home sales are somewhat firmer.

But ripple effects from the twin bankruptcies of General Motors and Chrysler could muddy the job market this month.

With companies in no mood to hire, the unemployment rate jumped to 9.4 percent in May, the highest in more than 25 years. But the pace of layoffs eased, with employers cutting 345,000 jobs, the fewest since September.

The much smaller-than-expected reduction in payroll jobs, reported by the Labor Department on Friday, adds to evidence that the recession is loosening its hold on the country. It marked the fourth straight month that the pace of layoffs slowed.

“This tide is turning,” said Richard Yamarone, economist at Argus Research. “We expect this trend of slower job loss to continue throughout the year.”

Still, the increase in the nation’s unemployment rate from 8.9 percent in April underscores the difficulties that America’s 14.5 million unemployed are having in finding new jobs. Economists had expected the rate to hit 9.2 percent last month.

If laid-off workers who have given up looking for new jobs or have settled for part-time work are included, the unemployment rate would have been 16.4 percent in May, the highest on records dating to 1994.

Labor Secretary Hilda Solis called the rise in May’s unemployment rate “unacceptable” and pledged to help bring it down by aiding the unemployed get new skills or training.

President Barack Obama’s stimulus package is expected to help bolster the economy. Vice President Joe Biden said he will join Obama on Monday in seeking to ramp up the pace this summer of the stimulus effort that Congress approved earlier this year.

Even with layoffs slowing, companies will be reluctant to hire until they feel certain that economic conditions are improving and that any recovery will last.

Since the recession began in December 2007, the economy has lost a net total of 6 million jobs.

As the recession — which is now the longest since World War II — bites into sales and profits, companies have turned to layoffs and other cost-cutting measures to survive the fallout. Those include holding down workers’ hours and freezing or cutting pay.

The average work week in May fell to 33.1 hours, the lowest on records dating to 1964. The number of people out of work six months or longer rose to more than 3.9 million in May, triple the amount from when the recession began.

Stocks rallied on the better-than-expected number of payroll reductions, but then gave back most of the gains. The Dow Jones industrial average added about 50 points in late-afternoon trading. Broader indexes were mixed.

Job losses — while slower in May — were still widespread.

Construction companies cut 59,000 jobs, down from 108,000 in April. Factories cut 156,000, on top of 154,000 in the previous month. Retailers cut 17,500 positions, compared with 36,500 in April. Financial activities cut 30,000, down from 45,000 in April. Even the government reduced employment — by 7,000 — after bulking up by 92,000 in April as it added workers for the 2010 Census.

Education, health care, leisure and hospitality were among the industries adding jobs in May. Solis believes the stimulus already has helped “to stabilize employment in the retail and service sectors” and played a role in reducing job losses in construction in May.

In another encouraging note, job losses in both March and April were less than previously thought. Employers cut 652,000 positions in March, versus 699,000 previously reported. They eliminated 504,000 jobs in April, less than the 539,000 initially estimated.

The deepest job cuts of the recession came in January when 741,000 jobs disappeared, the most since 1949.

Federal Reserve Chairman Ben Bernanke repeated his prediction this week that the recession will end this year, but again warned that any recovery will be gradual.

Many economists believe the jobless rate will hit 10 percent by the end of this year. Some think it could rise as high as 10.7 percent by the second quarter of next year before it starts to make a slow descent. The post-World War II high was 10.8 percent at the end of 1982.

Friday’s report “supports the notion that the recession will end this year,” Yamarone said. But pain will linger and the jobless rate will move higher. He predicts it will peak at 10.2 percent early next year.

The Fed says unemployment will remain elevated into 2011 given the expectation of tepid recovery. Economists say the job market may not get back to normal — meaning a 5 percent unemployment rate — until 2013. Economic recoveries after financial crises tend to be slower, economists say.

The Fed said Friday that consumer borrowing in April dropped by $15.7 billion, the second largest decline ever in dollar terms following March’s $16.6 billion, and more than double what economists had expected. Analysts believe consumers will remain cautious as long as the unemployment rate keeps rising.

Still, evidence has been mounting that the recession is letting up, with fresh signs emerging earlier this week.

The number of people continuing to draw unemployment benefits dipped for the first time in 20 weeks, and first-time claims also fell. Manufacturing’s slide is slowing. Builders are boosting spending on construction projects and a barometer of home sales firmed.

Although shoppers remain cautious according to sales results from major retailers, Bernanke and other economists are hopeful that consumers won’t return to the deep hibernation seen at the end of last year.

That’s when the recession hit with brutal force, causing the economy to contract at a 6.3 percent pace, the most in 25 years. Consumers cut their spending at the time by the most in nearly three decades. Economic activity shrank at a 5.7 percent pace in the first three months of this year, despite a rebound by consumers.

Many analysts believe the economy is shrinking at about a 2 percent pace in the current quarter, and that the economy could return to growth as soon as the third quarter.

Ripple-effects from General Motors Corp.’s filing for bankruptcy protection — the fourth largest in U.S. history — could muddy the outlook, some analysts said. GM said earlier this week it will close nine factories and idle three others indefinitely as part of its restructuring. The closings, which will take place through the end of 2010, will cost up to 20,000 workers their jobs.

© 2013 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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