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The US unemployment rate fell to a 16-year low in May but monthly job creation saw a sharp slowdown, the Labor Department reported Friday.

The historically low unemployment rate comes with the caveat that the labor force shrank last month.

Wages in May increased 2.5 percent from the year before, in line with the moderate growth they've shown in recent months.

The government's monthly jobs report produces a net gain by estimating how many jobs were created and comparing that figure with how many it estimates were lost. Consistent hiring has come despite historically soft economic growth of near a 2% annual rate since the expansion began eight years ago this month.

"Today's jobs report reflects that the labor market is tightening, and there's not as much room for slack as the economy reaches full employment....it's tough to continue to add 200,000 jobs each month with our unemployment rate below 5%", said Steve Rick, chief economist at CUNA Mutual Group, reports Fox Business.

Almost 80,000 retail jobs have been lost since February, according to the latest figures, and a dozen chains have announced closing or bankruptcy, including Rue21, BCBGMaxAzria, Payless, Wet Seal and H.H.Gregg.

Economists had expected nonfarm payrolls to grow by 145,000 with an unemployment rate of 4.4 percent. Payroll processor ADP estimated that businesses added 253,000 jobs last month.

The latest jobs report from the Bureau Of Labor Statistics are out and experts are split on what it means. Among 205,000 new service-providing jobs, the largest gains were in professional/business services (up 88,000 jobs), trade/transportation/utilities (up 58,000 jobs) and education/health services (up 54,000 jobs), it said.

The figures largely represent an aging population of Americans are increasingly retiring, but it could hit that modest wage growth is failing to pull some potential workers off the sidelines. The current pace of job growth is almost three times the rate necessary to absorb growth in the labor force. Government was also a drag on job creation, with 9,000 fewer positions. Data on consumer spending and manufacturing suggest the economy gained speed early in the second quarter after gross domestic product increased at a tepid 1.2 percent annualized rate at the start of the year. The unemployment rate has fallen by a 0.5 percentage point since then.

Pay gains may be weak in part because one crucial ingredient for economic growth - worker productivity - has been sluggish.

Economists had expected an increase of about 185,000 jobs compared to the jump of 211,000 jobs originally reported for the previous month. Workers generally enjoy higher incomes once they generate more value per hour on the job.

The report is strong enough to instill confidence and likely clear the way for the fed to raise interest rates later this month, the third hike since December.

Curt Long, National Association of Federally-Insured Credit Unions Chief Economist, said the May jobs report was a disappointment due to job growth failure and failed expectations.

"Fed officials have noted the weakness in inflation numbers of the past few months but have been willing to discount it as temporary", said Michelle Meyer, senior US economist at Bank of America Merrill Lynch. It would mark the first time the Fed raised the rate twice in a calendar year since 2006.