Employers added 192,000 jobs in the private sector this month, according to payroll giant ADP, with small businesses showing the largest job gains.

Mark Zandi

ADP also revised downward its December employment report by 30,000 to 185,000 jobs (see ADP Finds Private Sector Added 215,000 Jobs in December).

The service sector led the way, with a gain of 177,000 jobs, while the goods-producing sector recorded a gain of 15,000 jobs in January.

Small businesses added 115,000 jobs in January, including 58,000 at businesses with between 1 and 19 employees, and 57,000 jobs at businesses with 20 to 49 employees. Small businesses in the service-providing sector added 106,000 jobs, while the goods-producing sector accounted for 9,000 jobs.

Midsize businesses with between 50 and 499 employees added 79,000 jobs in January, while large businesses with 500 to 999 employees added 7,000 jobs. However, larger companies with 1,000 or more employees lost 9,000 jobs.

The financial activities industry added 12,000 jobs in January, while professional and business services added 40,000 jobs. Other industries that posted job gains included 33,000 jobs combined in the trade, transportation and utilities industries, and 15,000 jobs in the construction industry. However, the manufacturing industry lost 3,000 jobs.

“The job gains were broad-based across many industries, said Mark Zandi, chief economist at Moody’s Analytics, which produces the monthly employment reports with ADP. “Construction saw a good, solid gain, which is encouraging. Leisure, hospitality, trade, professional services and financial services all saw gains. There is weakness still in manufacturing although I think that will prove to be temporary, and we’ll get some manufacturing job growth as we move through the year. The gains were relatively broad-based across company size, although we did see a decline for the first time in a while in employment at large companies that employ over 1,000. That was offset by unusually large gains at smaller establishments.”

However, Zandi noted that may be related to seasonal adjustment issues. He believes underlying job growth has accelerated to about 175,000 a month. “That’s actually enough to allow for a steadily declining unemployment rate,” said Zandi. “If we stay at this current rate of job growth, the unemployment rate—which is currently at 7.8 percent—should be down by about half a point by the end of this year. That should put us at 7.3 percent, and south of 7 percent as we move to this time next year, the spring of 2014. Unemployment is still very high. It’s obviously going to take a long time to get back to something anyone would consider consistent with full employment, but nonetheless the job numbers do seem to be improving.”

However, there are a few headwinds blowing. The Commerce Department reported Wednesday that gross domestic product unexpectedly contracted 0.1 percent in the fourth quarter, but Zandi cautioned not to read too much into that number. He believes the economy is still growing between 2 and 2.5 percent. He ascribed the drop in the fourth quarter to a number of factors, such as a decline in farm inventory related to the drought in the Midwest last summer, as well as manufacturers who got hit by a slowdown in the global economy related to trade with Europe. “The decline in inventory in Q4 actually augurs well for growth in the current quarter and going forward, as manufacturers start to ramp things up,” said Zandi.  He expects manufacturing activity and employment to pick up later in the year.

Another factor contributing to the drop in GDP may stem from a drop in government spending, as government agencies prepare for budget cutbacks and the sequestration threat that was included in the debt ceiling deal. Zandi sees weakness in government spending related to such fiscal austerity measures, along with some weakness in trade because of conditions in Asia. However, he is starting to see economic conditions improve in China and the rest of Asia.

Another factor that could slow down the economy temporarily is the tax increases that were included as part of the fiscal cliff deal earlier this month, especially the expiration of the payroll tax holiday. “That is a hit to after-tax income of well over $100 billion,” said Zandi. He believes the most significant fallout from the expiration of the payroll tax cuts will be in the current quarter and Q2, when consumer spending will decline for a while. But he anticipates the impact will start to abate later in the year and by next year will not be very large.