WASHINGTON, June 5 (Reuters) - U.S. employment growth likely moderated in May after two straight months of strong gains, but the pace would probably remain consistent with stable labor market conditions.

Economists expected the Labor Department's closely watched employment report on Friday to confirm that the Middle East conflict, which has stoked inflation through a surge in oil prices, was yet to have material impact on the jobs market.

Fiscal stimulus, in the form of tax and tariff refunds, has bolstered corporate profits and allowed businesses to refrain from large-scale layoffs, they said. 

Businesses have been cautious about boosting hiring as they deal with uncertainty, first from President Donald Trump's sweeping tariffs last year and now the U.S.-Israeli war with Iran. Low layoffs are anchoring the labor market, keeping it in what economists have termed a "slow-hire, slow-fire" equilibrium, that gives the Federal Reserve room to keep interest rates unchanged while monitoring the inflation fallout from the war.

"I'm a bit surprised that things have held up as long as they have, but there's a couple of things that are playing out, tariff and tax refunds, those two factors, at least so far, have been sufficient to offset the higher gasoline and fuel prices," said Brian Bethune, an economics professor at Boston College.

"Tariff refunds, which are playing out probably to the tune of $150 to $200 billion, support corporate profits, so corporations are not really under severe pressure. The environment remains positive, although not terrific."

Nonfarm payrolls likely increased by 85,000 jobs last month after rising 115,000 in April, a Reuters survey of economists predicted. Estimates for job growth ranged from 50,000 to 125,000. Payrolls surged by 185,000 in March. May's anticipated gain would be above the monthly average of 76,000 so far this year.

Economists saw limited scope for large revisions to the prior payrolls counts after the Bureau of Labor Statistics, which compiles the employment report, updated the "birth-death" model it uses to try to estimate how many jobs were gained or lost because of companies opening or closing in a given month.

They estimated the economy needs to create between zero and 50,000 jobs per month to keep up with growth in the working-age population. The so-called break even rate has dropped because of an immigration crackdown that has reduced the labor force, limiting the rise in the unemployment rate. 

The unemployment rate was forecast unchanged at 4.3% for a third straight month, though some economists expected it could round up to 4.4%, which would not change the narrative of a stable labor market. The labor force has declined by about 500,000 since February, and a rebound was possible, which would lift the jobless rate.

Financial markets expect the U.S. central bank to keep its benchmark overnight interest rate in the 3.50%-3.75% range into next year. The U.S. Supreme Court in February struck down the tariffs and some businesses have filed for refunds. Corporate profits increased by $40.4 billion in the first quarter and have been rising since the second quarter of 2025.   

OIL SHOCK UNCERTAINTY

The Middle East conflict, now in its fourth month, has boosted gasoline prices by more than 40%. Inflation increased at its fastest pace in three years in April, the government reported last week. 

Given the oil shock uncertainty, hiring is marginal, and historically low layoffs account for much of the growth in payrolls. The Fed's Beige Book report on Wednesday noted that "hiring remained selective and primarily focused on critical roles or attrition replacement" in May.

"The stability is going to persist, but we're not betting on a strong rebound," said Stephen Douglass, chief economist at NISA Investment Advisors. "The risk is tilted toward the unemployment rate creeping higher over the next 12 months or so, and that will be enough to get the Fed to deliver a few more cuts after the war is resolved conclusively."

The anticipated moderation in employment growth last month would reflect the fading boost from favorable weather in April. A strike by 4,000 Harvard Graduate Students Union members was also expected to hold back job gains. Job losses in the transportation sector after the federal government restricted commercial driver licenses to non-U.S. citizens were likely, with economists' projections around 10,000 per month.

A further decline in federal government employment is expected. The White House last year launched an unprecedented campaign to slash the federal workforce as it seeks to remake the government. But there has recently been a push in some agencies to rebuild staff levels. 

Economists were divided on how soon the bankruptcy of Spirit Airlines would show up in the payrolls data. The healthcare sector was expected to continue anchoring payrolls amid an aging population. Gains were expected in the leisure and hospitality industry, partly linked to early hiring for the soccer World Cup tournaments. 

Economists at JPMorgan noted the recent acceleration in job growth was concentrated among industries with the most non-citizens and believed it could be sustained.

"Although immigration enforcement remains high, it is not in the headlines as much these days, and immigrants at risk of deportation could have become more focused on finding work given limited savings," they wrote in a note.