* Nonfarm payrolls forecast to rise by 325,000 in May
* Unemployment rate likely fell to 3.5% from 3.6% in April
* Average hourly earnings forecast increasing 0.4%
By Lucia Mutikani
WASHINGTON, June 3 (Reuters) - U.S. employment likely increased at a brisk clip in May, with the jobless rate expected to have dropped to its pre-pandemic low of 3.5%, signs of a tight labor market that could keep the Federal Reserve's foot on the pedal to cool demand.
The Labor Department's closely watched employment report on Friday, also expected to show strong wage gains last month, would paint a picture of an economy that continues to expand, although at a moderate pace.
The Fed is trying to dampen labor demand to tame inflation, without driving the unemployment rate too high. The U.S. central bank's hawkish monetary posture and the accompanying tightening of financial conditions have left investors fearful of a recession next year.
"This report is going to continue to exhibit signs of a tight labor market and when combined with the elevated inflation environment we are in, it further gives the Fed the confidence that they need to stay on their substantial monetary policy tightening path," said Sam Bullard, a senior economist at Wells Fargo in Charlotte, North Carolina.
Nonfarm payrolls likely increased by 325,000 jobs last month after rising 428,000 in April, according to a Reuters survey of economists. That would be the smallest gain in a year, and would end 12 straight months of payroll gains in excess of 400,000, the longest such streak on record. Employment would be about 865,000 jobs below its pre-pandemic level.
Estimates ranged from as low as 250,000 jobs added to as high as 477,000. Job gains, however, would still be way above the monthly average that prevailed before the COVID-19 pandemic started in 2020.
The survey was conducted before the ADP National Employment Report on Thursday, which showed private payrolls rose by only 128,000 jobs in May, the smallest gain in two years. That prompted economists at Goldman Sachs to lower their nonfarm payrolls forecast by 50,000 to 225,000.
Economists are split on whether the moderation in the pace of job growth is because of cooling labor demand or worker shortages, and urge investors to focus on the unemployment rate and wage growth to gauge the tightness of the jobs market. There were 11.4 million job openings at the end of April, with nearly two positions for every unemployed person.
"While we agree job growth is moderating, the labor market is still strong," said Kevin Cummins, chief U.S. economist at NatWest Markets in Stamford, Connecticut.