Employers cut 345,000 jobs from their payrolls in the month, down from the revised decline of 504,000 jobs in April.
This was the fewest jobs lost in a month since last September, when the bankruptcy of Lehman Brothers caused a crisis in U.S. financial markets and choked off credit for many businesses. Economists surveyed by Briefing.com had forecast a loss of 520,000 jobs in May.
There were still widespread job losses, as most sectors of the economy, including manufacturing, construction, retail, and business and professional services posted declines in jobs.
But there were also some signs of growth, notably in education and health services, as well as the leisure and hospitality sector. Nearly one third of industries added jobs during the month, the highest level of gains since last October.
Still, the unemployment rate rose to 9.4% from 8.9% in April. Economists expected unemployment would increase to 9.2%.
Strangely enough, economists said the rise in unemployment is partly a sign of an improved jobs outlook. That's because people who had stopped looking for work started looking once again, and thus were classified as unemployed rather than "not in the labor force" - which is how the Labor Department counts most discouraged workers.
"As conditions improve more people flock to the labor market," said Robert Brusca of FAO Economics. He believes the economy is poised to start adding jobs before the end of this year.
"Jobs are doing what they do at the end of recessions and in early recoveries," he said. "No one can be optimistic enough to catch the turn when it comes."
But other economists cautioned that even though it was a better-than-expected jobs report, there are still signs of weakness.
Kurt Karl, chief economist at Swiss Re, said he doesn't expect a monthly gain in jobs until at least the middle of 2010. With employers still cutting jobs and hours, he said consumers won't have enough money to spur an economic recovery in the near term.
"I think things are turning for the better. But it's a disappointingly slow turn," he said. "Consumers can't consume more with this kind of picture."
Karl pointed out that the loss of 345,000 jobs in a month was worse than any one-month drop in the previous three recessions. There have now been 6 million jobs lost since the start of 2008, with nearly half of them occurring in the first five months of this year.
"That 345,000, while an improvement, is still a lot of jobs," he said. "We're not out of the woods yet."
0:00/00:48Targeting your next jobThe unemployment rate was the highest since August of 1983. And the official unemployment rate only captures part of the pain being felt by job seekers.
More than a quarter of unemployed people have been out of work for six months or more, and the number of long-term unemployed reached nearly 4 million, the highest reading on records that go back to 1980.
There were also 9.1 million people who were working part-time jobs because they could not find full-time work or they had their hours cut back. This was also a record high.
When counting people who wanted full-time work who are working part-time, as well as some of the people who are not counted as unemployed because they had stopped looking for work, the so-called underemployment reading rose to a record level of 16.4%.
What's more, the average work week slipped again to a record low 33.1 hours. That pushed average weekly wages down as well during the month.
Tig Gilliam, chief executive of Adecco Group North America, a unit of the world's largest employment staffing firm, said the average hours worked will have to increase before the economy will be ready to start adding jobs again, as employers will be cautious about restarting their hiring.
Gilliam is also concerned that the number of temporary employees fell for the 17th straight month, another sign of employer wariness.
"That's doesn't suggest a dramatic improvement in hiring soon," he said. "We're still in a difficult labor market and it's going to take us time the rest of this year to work through to where companies are adding back jobs."
