Private sector employment grew modestly last month by 40,000 jobs, according to a report by payroll giant ADP.

The ADP National Employment Report showed that small businesses, with less than 50 employees, added 61,000 jobs in May. Midsized businesses, with between 50 and 499 employees, lost 3,000 jobs, however. The picture was even worse for large businesses, which subtracted 18,000 jobs.

ADP also revised upward its April payroll report, increasing it to 13,000 jobs from the originally reported 10,000 (see U.S. Added 10,000 Private Sector Jobs in April).

The service-producing sector accounted for the biggest increase in jobs in May, adding 77,000 jobs. However, the goods-producing sector lost 37,000 jobs, the 18th consecutive monthly decline. The manufacturing industry continued its losses, shedding 26,000 jobs, the 21st consecutive monthly decline. Construction also continued its losses, dropping 13,000 jobs.

ADP's figures have been diverging in recent months from the Labor Department's Bureau of Labor Statistics, which will release its May employment numbers on June 6. The BLS report for May is expected to reflect a loss of 60,000 jobs, according to consensus forecasts. The BLS statistics include both public and private sector employment, however. Also, the government counts striking workers as lost jobs, whereas ADP still counts them as long as the workers remain in the employers' payroll systems, explained Joel Prakken, chairman of Macroeconomic Advisers, the research firm that compiles the monthly reports for ADP. The two reports also have different ways of counting births and deaths.

"The take-home point from ADP's National Employment Report is that we have another month of very sluggish growth in employment consistent with the recent slowdown in GDP," said Prakken.

However, he believes the figures indicate that the economy is not heading for a recession. "In recessions, establishment employment sometimes falls by 200,000 and 400,000 a month, and we haven't seen that yet, whether you look at the BLS numbers or the ADP numbers," he said. "The ongoing corrections have not spilled over into the rest of the economy. It's hard to argue that we're entering a recession when service sector employment is growing at over 70,000 a month."

Small business growth also offers positive signs. "As has been the pattern for most of the last two years, employment grew at small firms, which is not surprising since small firms are concentrated in the service sector, which is not as vulnerable," said Prakken. "Small businesses have been the engines of growth in the last two years."

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