The United States may have hit a bump on the road to economic recovery, according to data released on Wednesday, with half a million private sector jobs lost in May and mortgage applications falling last week in the face of rising interest rates.

The reports illustrate the policy dilemma of the Federal Reserve, which has committed trillions of dollars to keep market interest rates low, only to watch them shoot higher in recent weeks.

One ray of hope, though, came from a report showing planned layoffs at U.S. firms fell for a fourth consecutive month in May, reaching the lowest level in eight months, suggesting the pace of future job cuts could slow.

But other data showed the service sector, which accounts for about 80 percent of economic activity, contracted for the eighth straight month in May, even though the rate of deterioration slowed.

It kind of fits with all the other news we're getting: things are less bad but they're not yet growing, said Jonathan Basile, economist at Credit Suisse in New York.

It's encouraging to see this stabilization process start to take hold, but at the same time the weakness does persist. These are still indications that we're not totally out of the woods yet.

The Mortgage Bankers Association said its seasonally adjusted index of mortgage applications, which includes both purchase and refinance loans, for the week ended May 29 decreased 16.2 percent to 658.7.

In the labor market, U.S. companies axed 532,000 jobs last month, more than economists had expected, according to ADP Employer Services.

Huge job losses are unlikely to lend support to the housing market or to an economy that has been overwhelmingly driven by consumer spending in recent years.

Worse yet, April's ADP figures were revised to show more job cuts than previously estimated, meaning May's job losses were smaller, but highlighting the ongoing deterioration in an economy that may have difficulty living up to expectations that it will resume economic growth in the second half of the year.


In the services sector, the Institute for Supply Management's non-manufacturing index edged up to 44.0 in May -- its strongest since October 2008 but was still a contractionary reading at 43.7 in April.

The last time the index was not contracting was in September 2008, when the index was at 50.0.

New orders received by U.S. factories rebounded less than expected in April, government data also showed, and the previous month's figure was revised sharply downward.

The weak economic data left Wall Street unimpressed, with U.S. stocks down more than 1.0 percent midsession <.SPX>.

U.S. Treasury bonds, which perform better during times of economic weakness, as they offer investors a safe-haven, were mostly higher on the day.

However, a report from outplacement consultancy Challenger, Gray and Christmas Inc. showed planned layoffs at U.S. firms fell for a fourth month in May, reaching the lowest level in eight months.

This lifted some of the gloom from the ADP report, which came ahead of Friday's more comprehensive labor-market data for both the private and public sectors from the U.S. Labor Department.

Planned job cuts announced by U.S. employers totaled 111,182 in May, down 16 percent from the previous month, according to Challenger, Gray and Christmas Inc.


Housing was at the epicenter of the financial crisis that led to the current U.S. recession.

Federal officials have been eager to help homeowners refinance out of onerous mortgages written during the boom of the last decade, when credit was cheap and few believed house prices could fall.

The fall in mortgage applications last week reflected a plunge in demand for home refinancing loans as interest rates surged to their highest levels since late-January.

On borrowing costs, Federal Reserve Chairman Ben Bernanke told the House Budget Committee on Wednesday that rising U.S. debt was contributing to a jump in longer-term interest rates.

So far, the Fed's program of purchasing fixed income assets has only slowed the rise in bond yields and home mortgage rates and the central bank will face further difficulty in keeping them low if the economy shows just enough progress to spur private sector lending.

Borrowing costs on 30-year fixed-rate mortgages, excluding fees, averaged 5.25 percent, up 0.44 percentage point from the previous week, its highest level since the week ended January 30.

(Additional Reporting by Julie Haviv, Richard Leong and Chris Reese)