NEW YORK (CNN/Money) - U.S. unemployment rose in May and businesses cut thousands of jobs, the government said Friday, but the report was still milder than many economists had expected.

Some analysts saw signs the long-suffering labor market could be close to a recovery, while others were delaying any victory parades and wondering if the Federal Reserve might still see enough economic weakness to cut interest rates later this month.

Unemployment rose to 6.1 percent from 6.0 percent in April, the Labor Department said, its highest level since July 1994. Economists, on average, expected a jobless rate of 6.1 percent, according to a Reuters poll.

Non-farm payrolls shrank by 17,000 jobs, the report said, after being unchanged in April. Economists, on average, expected 39,000 job cuts, according to Reuters.

Nine million people were unemployed in May, compared with 8.8 million in April.

"With the rise in the unemployment rate, it is hard to conclude that the labor market is anywhere near out of the woods," said Anthony Chan, chief economist at Banc One Investment Advisors.

Nevertheless, U.S. stock prices rose in early trading, and Treasury bond prices fell.

The unemployment rate rose to 6.1 percent in May, from 6.0 percent in April. CNNfn's Louise Schiavone reports. Play video (Real or Windows Media)

Several labor-market indicators in recent weeks had warned a weak jobs report was on the way, especially a stream of new claims for unemployment benefits numbering more than 400,000 every week, a benchmark sign of weakness.

But some other economic indicators have improved recently, including reports of stronger manufacturing activity, raising hopes that the worst might be over for the labor market, which typically lags behind the rest of the economy.

"While the labor market may feel like the weakest link in the recovery, really it's the last link," said Bill Cheney, chief economist at John Hancock Financial Services in Boston. "As long as employment doesn't collapse, the recovery will continue to gain strength. As it does, slowly jobs will be added and they will be the fuel that kicks the economy into a higher gear."

It took a moment for economists to put Friday's report in context, since the Labor Department dramatically revised the employers' survey it uses to figure out changes in payrolls.

In addition to changing seasonal adjustments and updating benchmark figures, the department created new industry categories, moving some jobs from manufacturing into services, in what it says is an effort to more accurately reflect the current economy.

According to the old data, the economy shed about 525,000 jobs in the first four months of 2003; according to the revised data, the economy lost only 114,000 during that time, when much economic activity slowed down during the walk-up to the war with Iraq.

"Certainly the economy now looks like it was in better shape in January-April than expected," said former Federal Reserve economist Lara Rhame, now an economist at Brown Brothers Harriman. "But these data don't show the economy making any improvement."

Rhame said she disagreed with the commonly held notion that employment was always a lagging indicator; indeed, the Labor Department data show businesses were firing people all the way back in January 2001, two months before most economists think a recession began.

If the Fed feels this way, it could be inclined to cut its target for a key short-term interest rate at its policy meeting scheduled for June 24 and 25. The cut would make borrowing cheaper, hopefully fighting the depressing effects of a weak job market on consumer confidence and wages.

"The Fed wants to see results, and this report didn't give it to them," said Joel Naroff, president and chief economist at Naroff Economic Advisors in Holland, Pa. "It looks right now as if the Fed will take out some extra insurance on June 25."

Other economists, however, see higher stock prices, lower gasoline prices, tax cuts and improving consumer confidence and expect the economy will have enough fuel to power it to recovery without a rate cut.

"This report will leave the markets still pushing for a Fed ease...but perhaps with a bit less conviction," said Ian Shepherdson, chief U.S. economist at High Frequency Economics Ltd. "It is still not a done deal."

In Friday's report, payrolls in goods-producing industries fell 29,000 in May, led by 53,000 jobs cut from the manufacturing sector.

Makers of computer and electronic products cut 16,000 jobs in May -- employment in that sector has fallen every month since January 2001.

Transportation equipment makers added 9,000 jobs, as temporary auto plant shut-downs ended. But General Motors (GM: Research, Estimates) and Ford (F: Research, Estimates) said this week they planned to cut production later this year due to expectations of weaker sales -- meaning auto workers could lose jobs again. The transportation equipment manufacturing industry has lost 320,000 jobs since October 1998.

Service-producing payrolls grew by 12,000, led by a 48,000-job surge in the Labor Department's new "professional and business services" category, which includes payrolls of temporary workers, which grew 58,000 in May. A surge in temp hiring could be a sign businesses are increasing activity and preparing to make permanent hires.

The average workweek, however, was unchanged at 33.7 hours -- indicating businesses didn't increase activity in May.

Average hourly wages rose 5 cents, or 0.3 percent, to $15.34 an hour from $15.25 in March. In a weak labor market, wage growth is a critical support to consumer spending, which makes up more than two-thirds of the nation's economy.