U.S. nonfarm payrolls grew at their fastest pace in 10 years in May, buoyed by recruitment for the decennial census, but private hiring slowed sharply, disappointing investors looking for a stronger figure.

KEY POINTS: * The Labor Department said on Friday payrolls rose 431,000 as the government hired 411,000 workers to conduct the population count. That was the largest monthly increase since March 2000 and marked a fifth straight month of gains. * Private employment, a barometer of labor market strength, increased just 41,000 after rising 218,000 in April. Employers did increase hours, however, and the average workweek increased to 34.2 hours from 34.1 hours in April. * Payrolls data for March and April was revised to show 22,000 fewer jobs created than previously reported. May's hefty employment gain lowered the unemployment rate to 9.7 percent from 9.9 percent in April. * Analysts polled by Reuters had expected non-farm payrolls to rise 513,000 and private businesses to create 190,000 jobs. The jobless rate had been seen dipping to 9.8 percent.

COMMENTS:

JIM O'SULLIVAN, CHIEF ECONOMIST AT MF GLOBAL, NEW YORK:

Markets will naturally take this report as weaker than expected, particularly the weak rise in ex-census and private payrolls in May. However, the data are volatile and we believe April and May need to be averaged. April was much stronger than expected a month ago. Averaging April and May, ex census payrolls gains are +122k per month so far in Q2 -- not very strong but a continued uptrend from +63k per month in Q1 and declines in earlier quarters. Nor did this week's ISM employment indexes show any loss of momentum in May vs April.

CARY LEAHEY, SENIOR MANAGING DIRECTOR, DECISION ECONOMICS, NEW YORK:

The market is treating the report as weak because you only got a small increase in private payrolls after a couple of months of solid gains, but underneath the surface the report is relatively strong -- you had a good-sized increase in the work week and you had a turnaround in earnings for the first time in many months, and you had a fairly good increase in manufacturing.

So the market is bothered by the fact that you had a smaller headline gain in private payrolls, and very little of it was in the services sector. But the market is treating the headline as all that really matters, which is a mistake, but I don't think you can fight the tape today -- the market is going to treat this as a weak report.

MARC PADO, U.S. MARKET STRATEGIST, CANTOR FITZGERALD & CO. IN SAN FRANCISCO:

This is unfortunately one of those cases of 'can you top this?' The estimates kept rising almost daily going into this number. If you look at what was expected of the private sector jobs which started out in the 70s, ended up -- just from private sector, they were looking for 180,000. That's a big number to have moved the expectations to that level.

Obviously we are seeing the gains of the last few days unwound. We are just still in that basing range with the S&P having recently pressed 1068, that was a little gap up from a closing low. We are just still in that base, we are still trying to stabilize the markets in here.

It certainly didn't help this morning that the euro broke that recent low versus the dollar this morning. When that broke, we saw the S&P futures slide, that was on the Hungary news. It's just compounding, unfortunately that is the issue.

WARD MCCARTHY, CHIEF FINANCIAL ECONOMIST, JEFFERIES & CO., NEW YORK:

It's weaker than expected, just throw out census workers because that's just an aberration. The change in private sector payrolls is the most significant because it's only up 40,000, which is the weakest increase since January.

On the other hand the household survey is positive because the unemployment rate dropped from 9.9 (percent) to 9.7. (percent). These two surveys don't always tell the same story.

TOM SOWANICK, CHIEF INVESTMENT OFFICER, OMNIVEST GROUP IN PRINCETON, NEW JERSEY:

This is yet another reason the Fed will not think to raise rates this year. This data is surprisingly less positive compared to the string of economic data we have been seeing this week. The number was disappointing. The only negative number were the construction figures but encouraging were the hours worked, which was up a teeny weeny bit. In England, this is what we call a 'punk' number. We have to see if today's disappointing number will give investors enough conviction to hold on to equity positions.

NICHOLAS TURNER, CHIEF OPERATING OFFICER, KAYE/BASSMAN, DALLAS, TEXAS:

This may not be as optimistic as people were hoping for, but nevertheless the momentum is picking up.

The trend underneath is actually far stronger than what the data is showing. But one of the things that will cause momentum to look slower than what people may be hoping for is the fact that there are people interchanging from one job to the next that had been sitting on the sidelines ... because of the amount of opportunities that are opening up.

CHRIS HOBART, FOUNDER OF HOBART FINANCIAL GROUP IN CHARLOTTE, NORTH CAROLINA:

The payroll numbers were well below where they were anticipated (to be). We saw the markets react to that very quickly this morning. It's unfortunate because with everything that is going on in the world economy we really needed more of a positive report today.

Most of the jobs are temporary jobs, a lot of them census jobs or government jobs. Overall, very disappointing.

The Fed will take that into consideration. They have to continue to be cautious about interest rate decisions going forward.

This economic recovery may not be as strong as we had hoped.

LINDSEY PIEGZA, ECONOMIST, FTN FINANCIAL, NEW YORK

Disappointing in terms of the growth we saw in the private sector, also with the first negative downward revision for the year. Obviously the headline number is pretty positive but that's short-term gains.

The household employment dropped by 35,000 so we had less workers coming into the labor force than we had in the previous month -- by a lot. We did expect to see a secular shift in the labor force -- certainly we're not going to be recreating the jobs we lost during the recession because one in for was related to the housing market. So there was expected to be a very broad secular shift.

Manufacturing came in strong. We are seeing pockets of strength in the private sector even though it was a disappointing number. But there is never a straight line in terms of a recovery.

We certainly know that the Fed is going to be watching the unemployment rate and making sure there is a very discernible downward trend before they make a move. They're going to have to make sure that the labor market is improving in terms of private sector growth.

HUGH JOHNSON, CHIEF INVESTMENT OFFICER, JOHNSON ILLINGTON ADVISORS, ALBANY, NEW YORK:

The headline number is not important; what is important, in my view, is the change in private-sector jobs. And it's good news that there is job growth.

It's somewhat disappointing job growth slowed in May, but it is not alarming. This number jumps around a lot from month to month, and what these numbers tell you is the economy is expanding, expanding at a very slow pace but nevertheless it is expanding.

If you look down through the sectors (in private sector job growth), it's fairly broad-based. If there's any disappointment, it's the construction jobs, suggesting there's weakness in housing still.

VASSILI SEREBRIAKOV, SENIOR CURRENCY STRATEGIST, WELLS FARGO, NEW YORK:

It's mainly disappointing. The number of private jobs created was well below expectations. I don't think this number means the recovery in the labor market has stalled. What it does suggest is that the pace of the recovery in the jobs sector is not as fast as some of the optimistic expectations in the market. We've seen the dollar fall versus the yen. The euro has also extended its losses and that's mainly a risk aversion thing. The market has a very cautious tone right now.

BORIS SCHLOSSBERG, DIRECTOR OF RESEARCH, GFT FOREX, NEW YORK:

It's kind of an ugly print, and the estimates were wildly overinflated. This shows the recovery continues but at a modest pace. Expectations going forward are going to be tempered.

What's interesting is the euro was already getting hammered on worries about Hungary and with the nonfarm payrolls not living up to expectations, the risk trade is under assault from every angle. This could push the euro below $1.20, as the market had been so primed for a stronger jobs number. There are so many stops from here to $1.20 that the temptation to run them is going to be overwhelming.

T.J. MARTA, FOUNDER AND MARKET STRATEGIST WITH MARTA ON THE MARKETS IN SCOTCH PLAINS, NEW JERSEY:

The initial take is this is a pretty bad number; well below expectations. The key disappointment was in the private payrolls. While we did get the census hiring, the private economy is not hiring the way we would have liked. Treasuries have responded pretty positively to the report.

MARKET REACTION: STOCKS: U.S. stock index futures extended losses. BONDS: U.S. Treasury debt prices rallied. DOLLAR: U.S. dollar fell against the yen.

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