The U.S. economy continues to generate jobs at a strong clip, but signs of a slowdown are growing.

In May, 296,000 jobs were added, the Labor Department reported Friday, and the nation's unemployment rate remained 4.3%, a 28-year low.

Last month's job gains, however, were all in the service sector, including 89,000 in retail, reflecting robust consumer spending.

Manufacturing payrolls fell 26,000, mirroring the steadily growing impact of the Asian financial crisis. Construction payrolls slipped 9,000, suggesting that the housing sector may be slowing.

Bruce Steinberg, chief economist at Merrill Lynch & Co., said he still thinks the Fed will not raise rates at its next monetary policy session, June 30 and July 1. "Despite the tightness of the labor market, there is still scant evidence of wage pressure developing," he said, noting that hourly wages edged up just 0.3%.

"But for the Fed to remain on hold beyond July, job growth must slow," he said.

Investors, who typically react sharply to the monthly job figures, were relatively subdued this time around. Interest rates rose briefly in the bond market but quickly fell back to previous levels. Stocks rose.

The relatively worry-free market response may mean the idea of a slowdown is gaining ground, and that fears of a Fed rate hike are receding- particularly after remarks last week by Federal Reserve Governor Laurence H. Meyer, a leading anti-inflation hawk.

He said the recent surge in inventories will probably soften business conditions in the months ahead. He also noted that downside risks to the economy from the crises in Asia and Russia have risen.

Addressing the 50th anniversary dinner of New York's Downtown Economics Club, Mr. Meyer said he was startled by the 4.3% jobless rate but also by the record $100 billion of first-quarter inventory investment-double what forecasters had expected.

"This should unquestionably contribute to some drag on production going forward," he said. "And in the last month or so the downside risk associated with Asia, Japan, and other emerging and transitional economies, including Latin America and Russia, appears to have increased."

He also cited stock prices as a key economic indicator to be watched. "The failure of the stock market to move to further highs this year" would, he said, "result in much diminished positive impulse" for consumer spending.

"The issue is really not whether or not the economy slows," he said. "I believe it will, though this belief has been tested and found wanting too often to want to dwell on. The issue is how much growth slows and when."

In a departure from usual practice, the press was barred from hearing Mr. Meyer's Wednesday evening speech, and the text of his remarks was not released until Thursday morning.

As usual, Mr. Meyer gave away nothing of crucial importance about Fed monetary policy.

He called the economy's current performance "exceptional but unsustainable" and said the Fed's job was to smooth the transition to "the best possible sustainable state."

"The transition might well occur while we play spectator," he said. "Or it could involve our more active participation. It depends!"

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