July 3 (Bloomberg) -- Employers in the U.S. cut more jobs than forecast in June and the unemployment rate rose to the highest in almost 26 years, limiting wages and threatening to erode the consumer spending essential to an economic recovery.

Payrolls declined by 467,000 and followed a 322,000 drop in May, according to Labor Department figures released yesterday in Washington. The jobless rate rose to 9.5 percent, the highest since August 1983. Earnings per hour climbed at a 0.7 percent annual pace on average over the last three months, the smallest gain since records began in 1964.

Stocks tumbled and bond yields fell as investors bet the 18th straight month of job cuts will further sap consumer spending, weakening a recovery from the deepest recession in half a century. The world’s largest economy has lost about 6.5 million jobs since December 2007 as companies from General Motors Corp. to Kimberly-Clark Corp. cut costs.

“The large number of layoffs in June is a warning that the recession still has a way to go before it ends,” said Joel Naroff, president of Naroff Economic Advisors in Holland, Pennsylvania. “The employment reductions have to slow soon if the economy is to start to rebound.”

The Standard & Poor’s 500 Index closed down 2.9 percent to 896.42 yesterday in New York. Treasuries rose, sending yields on benchmark 10-year notes to 3.49 percent from 3.54 percent the prior day.

The growing ranks of the jobless are allowing companies to restrain wage growth and cut hours, eroding the consumer spending that makes up about 70 percent of the economy. The average work week fell to 33 hours in June, the lowest level on record, pushing the average weekly paycheck to $611.49, down 0.5 percent since February.

Bargaining Power

“Workers’ bargaining power for wages is evaporating,” said Ryan Sweet, an economist at Moody’s Economy.com in West Chester, Pennsylvania. “Outright declines in wages could unravel the recent stabilization we’ve seen in consumer spending and home sales.”

Hourly earnings were 2.7 percent higher than June 2008, the smallest gain since September 2005.

President Barack Obama called the report “sobering news” and said it would take “more than a few months” to turn the economy around.

“While there are continuing signs that the recession is slowing, this is not much comfort to Americans who have lost their job,” Obama said yesterday in a Rose Garden appearance after meeting energy business leaders.

The payrolls decline in June was still well below the peak of 741,000 jobs lost in January, the most since 1949, suggesting a recovery remains likely later this year.

“The huge job losses of the first quarter are well behind us now,” said Chris Low, chief economist at FTN Financial in New York.

Growth Forecast

The economy is forecast to expand at a rate of 0.5 percent in the July to September period and 1.9 percent in the final three months of 2009, according to economists surveyed by Bloomberg in June.

Orders placed at U.S. factories climbed for a third time in four months in May on rising demand for aircraft, machinery and computers, separate figures from the Commerce Department showed yesterday, reinforcing signs of economic stabilization.

Payrolls were forecast to drop 365,000, according to the median of 79 economists surveyed by Bloomberg News. Estimates ranged from declines of 150,000 to 500,000.

The jobless rate was projected to climb to 9.6 percent from 9.4 percent in May. By the end of the year, unemployment will reach 10 percent, according to economists surveyed last month.

Factory Payrolls

The report showed factory payrolls fell by 136,000 in June. The drop included a decline of 26,500 jobs in auto manufacturing and parts industries. More firings are in the works following the bankruptcies of GM and Chrysler LLC as shutdowns ripple through auto-parts makers and car dealers.

Payrolls at builders fell 79,000. Service industries, which include banks, insurance companies, restaurants and retailers, subtracted 244,000 workers. Retail payrolls decreased by 21,000 and financial firms reduced 27,000 jobs.

Government payrolls decreased by 52,000, the biggest drop since July 2007. The U.S. Census bureau let go of people hired on a temporary basis to do preliminary work for the 2010 census. The government has said it’ll hire more than 1.4 million people over the next year to conduct the population count that happens once every 10 years.

California Governor Arnold Schwarzenegger has said he’ll force state workers to take a third unpaid day off every month to conserve cash and will order lawmakers into an emergency session to tackle the state’s growing budget deficit.

Tax Cuts

Tax cuts and Social Security payments under Obama’s $787 billion stimulus plan propped up incomes last quarter, supporting household purchases. Consumer spending rose in May as earnings climbed 1.4 percent, the most in a year.

Still, the wealth destruction caused by the housing and stock-market slumps prompted Americans to rebuild nest eggs. The savings rate in May surged to a 15-year high.

Household purchases dropped at a 0.6 percent annual rate last quarter before growing again in the second half of the year, according to the median forecast in a Bloomberg survey in June. Purchases rose at a 1.4 percent pace in the first three months of 2009.

Kimberly-Clark, the maker of Huggies diapers and Kleenex tissues, plans to cut 1,600 jobs worldwide by year-end. About 800 salaried employees will leave Deere & Co., the world’s largest maker of agricultural equipment, under a voluntary program.

‘Demanding Environment’

“These actions, while difficult, are necessary to help us emerge from this demanding economic environment,” Kimberly- Clark’s Chief Executive Officer Tom Falk said in a statement last month.

3M Co., the maker of Post-it Notes and Scotch Tape, reduced positions and offered early retirement to workers, while Dow Chemical Co., the largest U.S. chemical maker, is cutting jobs following the acquisition of Rohm & Haas Co.

The number of Americans filing claims for unemployment benefits last week fell in line with forecasts, Labor also said yesterday, indicating firings remain elevated.

To contact the reporter on this story: Shobhana Chandra in Washington schandra1@bloomberg.net

Last Updated: July 3, 2009 00:00 EDT