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With weak job growth and the end of the Federal Reserve's stimulus program staring investors in the face, the 5 percent drop in the S&P 500 from last month's high is half way toward the market's definition of a correction -- a 10 percent fall from a recent peak.

The broad market index on Friday recorded its worst week since mid-August and its fifth straight week of declines.

But fund managers displayed caution, rather than distress. Most see the recent data confirming a soft patch, or slowdown, after the government said the economy created a meager 54,000 jobs in May. Others say the economy may be headed for a double-dip recession.

The sharp fall in bond yields also points to a similar concern, but a full-blown downturn in equities isn't in the cards yet, investors say. For the year stocks still are positive, with the Dow up 5 percent, while the S&P 500 and the Nasdaq are each up about 3 percent.

"The markets will be choppy. They'll be looking for validation that this is just a soft patch we're going through, not the economy rolling over," said Mike Ryan, the New York-based head of wealth management research for the Americas at UBS Financial Services Inc, which oversees about $641 billion.

Some concede the stock market could see further declines from sovereign debt problems in Europe or a spillover of violence in Yemen into Saudi Arabia, which could lift oil prices, hurting the consumer.

The lack of market-moving economic data or corporate earnings next week could also make nervous investors hit the sell button more often than not. But the market mantra of "buying the dip," which has worked since the Fed started round two of its quantitative easing in August could prevail.

"Is another 5 percent (decline) possible here? I don't see why it wouldn't be, given the risk of contagion in Europe," said Natalie Trunow, chief investment officer of equities at Calvert Investment Management in Bethesda, Maryland, which manages about $14.8 billion.

"The market is constantly reconciling the fact that it's a slow recovery. We had a painful crash and a crisis and we are painfully, gradually getting out it. This pullback, and potentially further pullbacks from here in the next couple of months -- I view these as attractive entry points for longer-term investors."

Data that showed net inflows into global equity funds could confirm investors are not ready to throw in the towel.

Equity funds tracked by EPFR Global saw inflows of $1.7 billion in the week ending last Wednesday, distributed evenly between developed and emerging markets. The data comes after three weeks of outflows totaling $18 billion. Bond funds took in some $3.5 billion in net inflows, a sixteenth straight week of inflows.

From a technical standpoint the U.S. stock market showed some resilience also, despite the dismal jobs data.

The S&P 500 on Friday managed to close just above 1,300, keeping the April low just under 1,295 as strong near-term support.

To be sure, not all investors see just a soft patch in the economic data. Friday's payrolls report confirmed the loss of momentum in the economy, which was already flagged by other data from consumer spending to manufacturing.

And the end of the Fed's QE2, which helped lift the S&P 500 30 percent in the eight months to the end of April, is robbing the market of a much-needed source of liquidity.

"We'll see a selloff in the risk-on trades, in commodities and in global and U.S. stocks and the money is going short-term into the bond market," said Charles Biderman, chief executive of TrimTabs Investment Research in Sausalito, California.

"I just don't see where the money is coming from to take stocks higher, if the government is not going to be providing it."

(Reporting by Rodrigo Campos; additional reporting by Caroline Valetkevitch, Lucia Mutikani and Ryan Vlastelica; Editing by Kenneth Barry)

"We are restoring (production) at fast speeds despite ongoing aftershocks," Akio Toyoda, the grandson of the company's founder, told reporters during a visit to South Korea.

"We expect our output to recover to normal from November ... For Japan's domestic production, we expect to resume 90 percent of our normal output this month," he said.

Toyota and its local rivals have been plagued by shortages of hundreds of components after a magnitude 9.0 earthquake and tsunami on March 11 damaged factories in Japan's northeast.

Production at Toyota is returning to pre-quake levels faster than the company anticipated, with output in June likely to reach90 percent of pre-quake levels, a company spokesman confirmed on Wednesday.

That more optimistic outlook compares with a prediction last month for production to return to 70 percent of normal.

The president said in April that a complete recovery was expected in November or December.

Still, in 2011 overall production may be almost a million vehicles less than Toyota had planned to build at the beginning of the year. Lost output by the end of May was 900,000 cars.

Because Toyota builds 38 percent of its cars in Japan compared with a smaller 25 percent at Nissan Motor Co Ltd (7201.T) and Honda Motor Co Ltd (7267.T) the impact at Japan's biggest auto company has been greater.

The president visited South Korea, a small market for the auto giant, to "encourage dealers," a Toyota Korea representative said, at a time when the automaker is suffering from sales slump in the wake of the quake and a recall crisis.

Toyota's Lexus sales dived 51 percent in April in South Korea from a year ago, while other Toyota vehicle sales slid 41 percent, even as the imported vehicle market grew 14 percent led by vehicles from German carmakers, according to data by Korea Automobile Importers and Distributors Association.

Last year, Toyota sold a combined 10,486 Lexus and other models in the South Korean market dominated by Hyundai Motor (005380.KS) and Kia Motors (000270.KS).

A shortage of parts resulting from disrupted supply chains means it has lost ground in overseas markets. On June 2, Toyota said it sold only 38,500 cars in China during May, 35 percent less than a year ago.

In the United States, its main foreign market, sales in May slumped 28 percent.

In contrast, South Korean rivals Hyundai Motor and Kia Motors posted double-digit sales growth and a record-high combined market share last month in the key market, putting their combined U.S. sales almost on par with that of Toyota.

(Additional reporting by Tim Kelly in TOKYO; Editing by Robert Birsel)

With weak job growth and the end of the Federal Reserve's stimulus program staring investors in the face, the 5 percent drop in the S&P 500 from last month's high is half way toward the market's definition of a correction -- a 10 percent fall from a recent peak.

The broad market index on Friday recorded its worst week since mid-August and its fifth straight week of declines.

But fund managers displayed caution, rather than distress. Most see the recent data confirming a soft patch, or slowdown, after the government said the economy created a meager 54,000 jobs in May. Others say the economy may be headed for a double-dip recession.

The sharp fall in bond yields also points to a similar concern, but a full-blown downturn in equities isn't in the cards yet, investors say. For the year stocks still are positive, with the Dow up 5 percent, while the S&P 500 and the Nasdaq are each up about 3 percent.

"The markets will be choppy. They'll be looking for validation that this is just a soft patch we're going through, not the economy rolling over," said Mike Ryan, the New York-based head of wealth management research for the Americas at UBS Financial Services Inc, which oversees about $641 billion.

Some concede the stock market could see further declines from sovereign debt problems in Europe or a spillover of violence in Yemen into Saudi Arabia, which could lift oil prices, hurting the consumer.

The lack of market-moving economic data or corporate earnings next week could also make nervous investors hit the sell button more often than not. But the market mantra of "buying the dip," which has worked since the Fed started round two of its quantitative easing in August could prevail.

"Is another 5 percent (decline) possible here? I don't see why it wouldn't be, given the risk of contagion in Europe," said Natalie Trunow, chief investment officer of equities at Calvert Investment Management in Bethesda, Maryland, which manages about $14.8 billion.

"The market is constantly reconciling the fact that it's a slow recovery. We had a painful crash and a crisis and we are painfully, gradually getting out it. This pullback, and potentially further pullbacks from here in the next couple of months -- I view these as attractive entry points for longer-term investors."

Data that showed net inflows into global equity funds could confirm investors are not ready to throw in the towel.

Equity funds tracked by EPFR Global saw inflows of $1.7 billion in the week ending last Wednesday, distributed evenly between developed and emerging markets. The data comes after three weeks of outflows totaling $18 billion. Bond funds took in some $3.5 billion in net inflows, a sixteenth straight week of inflows.

From a technical standpoint the U.S. stock market showed some resilience also, despite the dismal jobs data.

The S&P 500 on Friday managed to close just above 1,300, keeping the April low just under 1,295 as strong near-term support.

To be sure, not all investors see just a soft patch in the economic data. Friday's payrolls report confirmed the loss of momentum in the economy, which was already flagged by other data from consumer spending to manufacturing.

And the end of the Fed's QE2, which helped lift the S&P 500 30 percent in the eight months to the end of April, is robbing the market of a much-needed source of liquidity.

"We'll see a selloff in the risk-on trades, in commodities and in global and U.S. stocks and the money is going short-term into the bond market," said Charles Biderman, chief executive of TrimTabs Investment Research in Sausalito, California.

"I just don't see where the money is coming from to take stocks higher, if the government is not going to be providing it."

(Reporting by Rodrigo Campos; additional reporting by Caroline Valetkevitch, Lucia Mutikani and Ryan Vlastelica; Editing by Kenneth Barry)

Nonfarm payrolls increased 54,000 last month, the Labor Department said on Friday, with private employment rising 83,000, the least amount since June. Government payrolls dropped 29,000.

Economists polled by Reuters had expected payrolls to rise 150,000 and private hiring to increase 175,000 in May. The government revised employment figures for March and April to show 39,000 fewer jobs created than previously estimated.

The job creation slowdown confirmed the economic weakness already flagged by other data from consumer spending to manufacturing. It could stoke fears about the depth and duration of a slowdown that started early in the year.

The Labor Department said severe weather last month, including tornadoes and flooding, in the Midwest and the South did not materially affect data collection.

It also said that while some workers in those regions may have been temporarily displaced from their jobs, it found "no clear impact of the disasters on the national employment and unemployment data for May."

Economists still believe the lull in activity will be temporary. They cite high gasoline prices, bad weather and disruptions to motor vehicle production because of a shortage of parts from Japan as factors weighing on growth.

"It is clear we have temporarily entered a soft patch," said Christopher Probyn, chief economist at State Street Global Advisors in Boston, before the report.

"Nobody knows how soft and how long, but the best case view is that the fundamentals of the recovery remain intact and the economy will re-accelerate in the second half of the year."

The report provides one of the best early reads on the health of the U.S. economy and it regularly sets the tone for global financial markets. Worries about the pace of the U.S. economic recovery weighed on stocks on Thursday.

While the recent string of weak data has sparked talk about the need for the Federal Reserve to extend its asset purchasing program when it expires this month, analysts believe policymakers will take a soft payrolls report in stride.

Officials at the U.S. central bank regard the current downshift in the economy as temporary.

The Fed has been mapping out a strategy on how to start removing some of the massive stimulus it has lent the economy, and officials have made clear the bar for a further easing in monetary policy is high.

TEMPORARY FACTORS AT PLAY

"We should keep in mind that we have seen a lot of factors weighing on the U.S. economy in April and May, and should take this report with a pinch of salt," said Harm Bandolz, chief U.S. economist at UniCredit Research in New York.

"We may see some positive surprises in the second half of the year once the impact fades."

High gasoline prices hurt consumer spending in the first quarter, restricting economic growth to a 1.8 percent annual pace after expanding at a 3.1 percent rate in the October-December period.

The economy has regained only a fraction of the more than 8 million jobs lost during the recession. Economists say payrolls growth above 300,000 a month is needed to make significant progress in shrinking the pool of 13.9 million unemployed Americans.

The unemployment rate rose to 9.1 percent last month from 9.0 percent in April as some discouraged workers who had been inspired by the pick-up in hiring in April re-entered the labor market.

"There is so much slack in the labor market it's going to take a long time to get the unemployment rate down to between 6 and 7 percent. That's going to take years," said Stephen Bronars, a senior economist at Welch Consulting in Washington.

That could be bad news for President Barack Obama, whose chances of re-election next year could hinge on the health of the economy, particularly the labor market.

The employment report showed weakness across the board, with the private services sector adding 80,000 jobs last month after increasing payrolls by 213,000 in April.

Within the private services sector, leisure and hospitality fell, showing no boost from McDonald's recruitment of about 50,000 new staff in April, which was after the survey period for that month's payrolls. Spring is traditionally a strong hiring period for McDonald's.

Retail employment, which recorded its largest increase in 10 years in April, fell 8,500 last month. Manufacturing payrolls growth contracted 5,000 last month, while construction employment rose 2,000.

The report showed the average work week steady at 34.4 hours and few signs of wage inflation, with average hourly earnings rising 6 cents.

(Reporting by Lucia Mutikani, Editing by Andrea Ricci)

U.S. employment gains probably lost steam in May as high energy prices and the supply chain effects of Japan's earthquake and tsunami bogged down the economy.

Nonfarm payrolls likely increased by 150,000 last month, according to a Reuters survey of economists after advancing by an 11-month high of 244,000 jobs in April.

Recent economic data such as regional manufacturing data has pointed to a slowing economy, although some analysts believe the data indicates the recovery has hit a soft patch.

After closing at its highest level since June 2008 on April 29, the S&P 500 has dropped 3.7 percent.

Other data set for release include May's U.S. ISM non-manufacturing index at 10 a.m. EDT <1400 GMT>, which is likely to provide further evidence on the pace of recovery in the world's largest economy. Economists looked for a reading of 54 versus the prior month's 52.8.

S&P 500 futures fell 3.7 points and were below fair value, a formula that evaluates pricing by taking into account interest rates, dividends and time to expiration on the contract. Dow Jones industrial average futures dipped 31 points, and Nasdaq 100 futures lost 7.5 points.

Hackers broke into Sony Corp's (6758.T)(SNE.N) computer networks and stole information about more than 1 million customers, further exposing the vulnerability of the electronics giant's systems.

European shares slipped early Friday, extending this week's selloff on global growth worries and on cautious ahead of the U.S. labor report. .EU

Asian stock markets were mixed Friday, with LG Electronics Inc (066570.KS) losing ground in Seoul on concerns about its earnings outlook, while new listings in Hong Kong attracted strong demand.

U.S. stocks ended a volatile trading session Thursday mostly flat as investors were reluctant to make bets a day before the payrolls report.

(Reporting by Chuck Mikolajczak; editing by Jeffrey Benkoe)