Private sector employers added only 119,000 jobs in April, according to payroll giant ADP, indicating a slowdown in employment perhaps caused by the increase in payroll taxes and effects from the budget sequester in Washington.

Small businesses with one to 19 employees added 34,000 jobs, while small businesses with 20 to 49 employees added 17,000 jobs. Midsize businesses with 50 to 499 employees added 26,000 jobs. Large businesses with 500 to 999 employees added 8,000 jobs, while larger businesses with 1,000 employees or more gained about 35,000 jobs. The estimated gain in jobs from February to March was also revised down to 131,000 (see ADP Finds Private Sector Added 158,000 Jobs in March).

Most of the job gains in April came in the service sector, which added 113,000 jobs, while the goods-producing sector added just 6,000 jobs.

The professional and business services sector, which includes accounting and tax preparation firms, as well as other types of services, added 20,000 jobs in April. The combined trade, transportation and utilities sector saw job gains of 29,000, while the construction industry added 15,000 jobs. However, the manufacturing industry lost 10,000 jobs.

Mark Zandi, chief economist of Moody’s Analytics, which compiles the monthly employment report with ADP, said the jobs gains appear to be throttling down from about 175,000 a month down to around 125,000 a month. “That’s OK and it will probably forestall any increase in unemployment, but it’s certainly not enough to generate any declines in unemployment in a real significant way,” he said in a conference call with reporters Wednesday. “The only way is if the labor force continues to contract. This is a bit disappointing and shows the economy is growing more slowly coming into the spring and summer of this year.”

The slowdown is primarily due to the fiscal drag of the tax increases and spending cuts, Zandi observed. “They are starting to bite and starting to weaken growth,” he added. “It’s affecting all industries and almost all company sizes. The drag is very significant. If you tote up the impact on GDP from the tax increases and the spending cuts this year, it’s going to be about one and half percentage points of GDP. That’s the most fiscal drag that we’ve tried to digest as a nation since after World War II. This is a very ambitious effort at fiscal austerity, so it’s not surprising that it’s taking a bite out of the economy.”

Zandi predicted that the apex of the fiscal drag will be in the current quarter, Q2, and into Q3, when it will subtract about two percentage points from GDP growth, further weakening economic activity. “The tax increases and spending cuts from the sequester are all starting to kick in now and have an impact on the job market,” he said.

The other factor that may be playing a role in weakening employment growth is health care reform, especially among companies with around 50 employees.

“Companies that have close to 50 employees have some big decisions to make,” said Zandi. “If you’re over 50 employees, or full-time equivalents, in 2013, you have to provide health care insurance to your workers or you get penalized in 2014. If you’re less than 50, there’s no significant impact on you. So that 50-employee threshold is important, and it feels like health care reform is having an impact.”

Zandi cautioned that the evidence is circumstantial and more data is needed over the next few months before drawing any firm conclusions. Health care reform has both pluses and minuses in terms of its impact on the broader economy. But Zandi noted that the slowdown in job growth in the last few months has primarily been among small companies with employee sizes around the 50 threshold, particularly at businesses in the leisure and hospitality, retail and construction industries, which are where the impact of the health care law is expected to be the most significant.

“The next three or six months, maybe even through the end of the year, are going to be soft,” he said. “The recovery will remain intact, but it’s going to be growing slowly, and the job growth we’re going to get really is not going to be enough to bring down unemployment in a meaningful way, unless we get a big plunge in the labor force, which isn’t particularly encouraging.”

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