July 3 (Bloomberg) -- U.S. employers cut jobs for a sixth straight month and service industries shrank in June, signaling that the economic slowdown may deepen as the impact of federal tax rebates fades.

Payrolls fell by 62,000 after a 62,000 drop in May that was greater than first reported, the Labor Department said today in Washington. The unemployment rate held at 5.5 percent after soaring the most in two decades in May. The Institute for Supply Management's non-manufacturing index sank to a five-month low.

Falling employment, along with record gasoline prices and tumbling home values, may cause consumers to tighten their budgets after spending the more than $100 billion of tax rebates. The longest string of payroll declines since the economy was pulling out of the last recession indicates limited scope for a Federal Reserve interest-rate increase this quarter.

``After the tax rebates are gone in another 30 days, you'll see consumer spending drop back,'' said Stuart Hoffman, chief U.S. economist at PNC Financial Services Group Inc. in Pittsburgh. ``There will not be any employment or real wage growth to help real spending in the second half of the year.''

Stocks ended the session mixed and Treasuries dropped. The Dow Jones Industrial Average added 0.7 percent to close at 11,288.5, while the Nasdaq Composite Index lost 0.3 percent to 2,245.4. Benchmark 10-year note yields were at 3.98 percent at 3 p.m. New York time, from 3.95 percent late yesterday.

Losses by Industry

Today's Labor report showed job losses at businesses including retailers, builders, manufacturers and financial firms. The June data brought the drop in payrolls for the first half of 2008 to 438,000. Last year, gains averaged 91,000 a month. Revisions subtracted 52,000 from previously reported totals for April and May.

``It's really a weak labor market,'' Kathleen Stephansen, chief global economist at Credit Suisse Holdings USA Inc. in New York, said in an interview with Bloomberg Radio. ``When you look at the details it seems as though there is no redeeming factor here. You have weakness in most industries.''

The Tempe, Arizona-based ISM said its index of non- manufacturing businesses, which make up almost 90 percent of the economy, decreased to 48.2, the lowest since January, from 51.7 in May. A reading of 50 is the dividing line between growth and contraction. The median projection was for a decline to 51.

The survey's employment index was the lowest since the series began in 1997.

Economists had projected payrolls would drop by 60,000 after a previously reported 49,000 decline in May, according to the median of 81 forecasts in a Bloomberg News survey.

Recession Call

Trends in jobs, sales, production and incomes, in addition to changes in gross domestic product, are the criteria used by the National Bureau of Economic Research to determine when contractions begin and end. The Cambridge, Massachusetts, group is the arbiter of U.S. recessions.

The last time payrolls fell for at least six consecutive months was the 15-month slump through May 2002. The most recent recession lasted from March to November of 2001.

``Tight credit conditions, the ongoing housing contraction, and the rise in energy prices are likely to weigh on economic growth over the next few quarters,'' Fed Chairman Ben S. Bernanke and his colleagues said last week, when they kept their benchmark rate at 2 percent. Central bankers had also signaled that inflation was an increased risk.

Rate Outlook

Traders see a 44 percent chance of the Fed keeping its rate unchanged in September, up from 38 percent odds yesterday, interest-rate futures contracts show. Futures still indicate a quarter-point increase in the benchmark rate as the most likely outcome at the meeting after no change at the August gathering.

Another report from the Labor Department today showed initial claims for unemployment benefits rose by 16,000 to 404,000 last week. The four-week average reached the highest level since October 2005, just after Hurricane Katrina.

Senator Barack Obama, the presumptive Democratic presidential nominee, called for Congress to pass measures including extended benefits for the unemployed to help the economy. Senator John McCain, his Republican counterpart, urged ``tax relief'' and a plan to lower health care costs.

Oil prices that topped $145 a barrel today are hammering manufacturers and service companies alike. Factory payrolls dropped by 33,000 workers after declining by 22,000 in May.

Strike Ends

Auto manufacturing and parts industries gained 5,600 jobs, reflecting the end of a walkout at an auto parts manufacturer, the report said. About 20 General Motors Corp. plants that were shut or partially idled returned to work after a 12-week strike at American Axle & Manufacturing Inc. was resolved in late May.

The worst housing slump in a quarter century and the resulting collapse in subprime lending were reflected in today's report. Payrolls at builders declined by 43,000, bringing the loss since September 2006 to 528,000. Financial firms trimmed payrolls by 10,000.

Service industries, which include banks, insurance companies, restaurants and retailers, added 7,000 workers. Retail payrolls decreased by 7,500. Government payrolls rose.

Bank of America Corp., the second-largest U.S. bank, will cut about 7,500 jobs after buying Countrywide Financial Corp. amid mounting subprime-mortgage losses, it said June 28. Starbucks Corp., the world's largest coffee shop chain, will close 600 U.S. locations and eliminate up to 12,000 jobs, the most in its history, the Seattle-based company said this week.

The average work week remained at 33.7 hours. Average weekly hours worked by production staff slipped to 40.8 from 40.9, while overtime was unchanged at 3.9 hours. That brought the average weekly earnings up $2.02 to $606.94 last month.

Workers' average hourly wages rose to $18.01, up 6 cents or 0.3 percent. Hourly earnings were 3.4 percent higher than in June 2007, the smallest 12-month increase since January 2006. Both increases were in line with forecasts.

To contact the reporter on this story: Bob Willis in Washington at bwillis@bloomberg.net

Last Updated: July 3, 2008 16:29 EDT