Private sector employment increased by 188,000 jobs from May to June, according to payroll giant ADP, providing further evidence that the economy is slowly recovering despite payroll tax increases and government spending cuts.

Most of the gains came in the service sector, where employers added 161,000 jobs, while the goods-producing sector increased by 27,000 jobs. ADP also revised downward slightly its May employment numbers from 135,000 to 134,000 jobs added (see ADP Finds Private Sector Added 135,000 Jobs in May).

In June, small businesses with between one and 19 employees added 54,000 jobs, while those with 20 to 49 employees added 31,000 jobs.

Midsize businesses with between 50 and 4999 employees added 55,000 jobs. Large businesses with 500 to 999 employees added 12,000 jobs, while even larger businesses with 1,000 employees or more added 37,000 jobs, for a total of 49,000 jobs at large businesses.

The professional and business services sector, which includes accounting and tax preparation among other services, added 40,000 jobs last month. The financial activities sector added 13,000 jobs, nearly double the average monthly pace through the first five months of the year.

The construction industry also showed signs of improvement, with 21,000 jobs added in June, the largest gain since January. The manufacturing industry added 1,000 jobs after two straight months of decline, while the combined trade, transportation and utilities sector added a total of 43,000 jobs, the strongest increase since the beginning of the year.

“The job market continues to gracefully navigate through the strongly blowing fiscal headwinds,” said Mark Zandi, chief economist of Moody’s Analytics, which compiles the monthly employment reports with ADP. “Health care reform does not appear to be significantly hampering job growth, at least not so far. Job gains are broad based across industries and businesses of all sizes.”

He believes there are a few factors that offset the fiscal drag caused by the increases and government spending cuts this year. “One factor was the surge in the stock market up until very recently,” he said in a conference call with reporters Wednesday. “Even with the recent correction in the stock market, it’s up quite significantly. I think that’s buoyed spirits and spending by high-income households and also buoyed the sentiment of the business executives and gave them a reason to hang tough in terms of their payrolls and investment through the last few months. I also think the improvement in the housing market, particularly the surge in house prices—they’re up double digits too over the past year—has also been quite significant and important to the recovery and consumer spending. That’s been a big plus. Both the run-up in house and stock prices were more significant than a lot of people, including myself, would have anticipated. I expected them to improve, but not to the degree that they did.”

He also pointed to the impact of oil prices, which are up at the moment, but have been down for most of the year. “Gasoline prices have fallen since peaking, I believe, back in February,” Zandi added. “That’s been a big plus for lower- and middle-income households. A decline in gasoline prices is like a tax cut. It largely offset the ill effects of the tax increase from the expiration of the payroll tax holiday. I think all those things really came together and offset the more significant fallout from the fiscal drag, at least so far.”

However, he added as a caveat that there may be declines in the third quarter, when government furloughs are expected to increase, and the job numbers may be subject to later revision.

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