WASHINGTON (June 6, 2007, Wall St. Journal)-- Evidence mounted Friday that the U.S. economy is on the rebound after a lackluster first quarter as employment posted a solid increase last month and manufacturing strengthened.

Friday's slew of positive economic reports, which included strong consumer spending, suggest the Federal Reserve will stay sidelined for the next several months and maybe even into 2008 as the economy conforms to its forecast of steady recovery and moderating inflation -- a view supported by another decline in annual core inflation.

Nonfarm payrolls increased 157,000 in May, after growing 80,000 in April and 175,000 in March, the Labor Department said Friday. Monthly job growth has averaged a robust 133,000 so far this year.

The unemployment rate was unchanged at 4.5%.

Average hourly earnings increased 0.3% to $17.30. That was up 3.8% from a year earlier, suggesting wage inflation is under control despite the tight jobs market.

The figures were in line with Wall Street expectations.

"There is no sign in these data that a softer labor market is undermining the economy, leaving open the prospect for a more buoyant U.S. economy later in the year," said Rob Carnell, economist at ING Bank, in a research note.

Gross domestic product advanced just 0.6% last quarter, its slowest pace since 2002. However, economists expect that quarter to mark the low point with growth returning to its potential later this year as business spending picks up and the drag from the lackluster housing market gradually wanes, though, a report from the National Association of Realtors showing a second-straight decline in its pending existing home sales index suggests the housing adjustment continues. (See related article.)

Still, with the jobless rate near six-year lows, consumers should remain supported in coming months despite the drag from housing, as evidenced by an increase in consumer confidence last month, also reported Friday. Consumer spending makes up about two-thirds of GDP, so even modest growth there can offset sizable drags in other sectors.

The Commerce Department said in a separate report Friday that consumption advanced a sturdy 0.5% in April, even though incomes dropped slightly.MFR Inc. economist Joshua Shapiro said the figures suggest "that consumer spending began [the second quarter] with more momentum than we were expecting, which obviously bodes well for [second quarter] growth."

Friday's mix of data suggest the Fed will hold interest rates steady at 5.25% for an eighth-straight time when it meets at the end of this month. And it confirms the prevailing view among Fed officials that the economic outlook has brightened.

"Masterly inaction is the best game plan for the Fed right now," said Nigel Gault, chief U.S. economist at Global Insight, in a research note.

That outlook was supported by a second-straight rise in the Institute for Supply Management manufacturing index to 55 in May. Numbers above 50 signal expansion.

Meanwhile, the Commerce report showing inflation on the retreat should keep the prospect of rate increases off the table. The personal consumption expenditures price index excluding food and energy -- the Fed's preferred inflation gauge -- advanced just 0.1% in April, bringing the annual rate from 2.1% to 2%, which is widely considered to be the top edge of the Fed's preferred inflation zone. The overall PCE price index rose 0.3% on the month.

The employment data will also keep Fed officials scratching their heads about what they described in their May meeting minutes as the "apparent tension" between the sluggish economy over the past year and still-robust labor markets. Officials raised a number of possibilities from measurement problems to the lag between the housing downturn and construction employment.

The Labor Department said hiring last month in goods producing industries fell by 19,000. Within this group, manufacturing firms cut 19,000 jobs -- the 11th-straight decline -- while construction employment was flat, again confounding expectations of a decline in that sector.

Service-sector employment, in contrast, swelled 176,000. Retail fell by 4,900. Business and professional services companies' payrolls rose 32,000. Education and health services employment jumped by 54,000. Leisure and hospitality soared 46,000, while the government added 22,000 jobs.

The average work week was up 0.1 hour at 33.9 hours.

--Jeff Bater contributed to this article.