Friday's employment report is expected to show continued weakness in the labor market, and could well be a key piece of data to convince the Federal Reserve to cut interest rates, some experts say.

The number of nonfarm payrolls is forecast to have dropped by 25,000 in May, after declining in the prior three months. The unemployment rate is predicted to have ticked up a percentage point to 6.1%.

Despite reports of strength in the service sector of the economy, employment continues to be a weak link of the recovery. The Labor Department said on Thursday that applications for first-time unemployment benefits were at their highest level in five weeks in the week ended May 31.

"The employment report will be pivotal for the call on the Fed," said David Rosenberg, an economist at Merrill Lynch, in a research note Thursday. "If payrolls come in as we expect, the Fed will likely ease."The Fed is scheduled to decide on monetary policy June 25. Meanwhile, Rosenberg expects the economy to have shed 60,000 payrolls in May, bringing its four-month job-loss tally to 585,000.

"Outside of recessions, in the post-World War II era, payrolls have never declined for four months in a row. This would have Greenspan concerned," said Rosenberg, who expects a 6.1% jobless rate for May.

Some economists think the Fed could opt for an emergency rate cut before June 25. "The Fed might be compelled to act sooner," said Tony Crescenzi, bond market strategist at Miller Tabak and a columnist for RealMoney.com. "After the last recession, it cut rates numerous times on payroll Friday."

In the wake of the initial jobless claims data and the European Central Bank's decision to cut interest rates on Thursday, fed funds futures were pricing in 100% odds of a 25-basis-point cut June 25. "The Fed wants to keep the momentum of the markets moving," Crescenzi said.

Greenspan already has telegraphed his willingness to cut interest rates, citing a weak labor market and concerns about deflation at an International Monetary Conference earlier this week.

"We don't have a lot of experience dealing with deflation," Crescenzi said. "The Fed is trying to assure the markets that it will do all it can to prevent that wretched condition."

Meanwhile, weekly initial jobless claims rose by 16,000 to 442,000 in the week ended May 31. The four-week average, which adjusts for volatility, was 430,500, a high level as well.

"This is a serious sign of continued layoffs," said Ethan Harris, an economist at Lehman Brothers. "Almost any way you slice these claims data, they are at distressingly high levels." For the past 16 weeks, claims have been above 400,000, a level that is indicative of strain in the labor market.

Among companies that have recently set plans for staff reductions is FedEx ( FDX), which said it would offer voluntary severance incentives. Elsewhere, biotech Allos Therapeutics ( ALTH) said it would cut 30% of its workforce, or 32 jobs, in order to reduce costs.

The announcements reflect a determination among corporations to do more with less in a slow-growth economic environment. Arguably, it is working. Productivity rose 1.9% in the first quarter. But the dark side of productivity gains is continued job losses in the short term.

In order for a job market expansion, GDP growth needs to be above trend, economists believe. "The message the Fed is sending is that it is not going to be happy with 3.5% economic growth," Harris said. "Only with 4% growth will we start to see real healing in the labor market."

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