By Leah Schnurr
NEW YORK (Reuters) - Companies hired the fewest employees in seven months in April while manufacturing growth slowed to a crawl, suggesting the economy has run into a soft patch as budget-cutting in Washington starts to bite.
Businesses added 119,000 employees to payrolls last month, according to the ADP National Employment Report released on Wednesday, short of economists' expectations for 150,000 jobs and the smallest gain since last September.
The slowdown was primarily due to the effect of tighter fiscal policy through a combination of an increase in payroll taxes at the start of the year and the $85 billion government spending cuts that took effect across the board in March, said Mark Zandi, chief economist at Moody's Analytics, which jointly develops the ADP report.
"They are starting to bite and starting to weaken growth," said Zandi. "It's affecting all industries and almost all company sizes."
The Federal Reserve also expressed concern about the drag on growth linked to fiscal belt-tightening and said the central bank could lift or taper the pace of its asset purchases depending on the economy's performance.
The Fed is currently buying $85 billion a month in bonds as it tries to spur the recovery.
After reaccelerating in the first quarter, recent data suggests overall economic growth cooled heading into the second quarter, a familiar pattern seen in past years that has become known as a "spring swoon."
This is partly due to the fiscal tightening, though growth would likely have pulled back regardless after a stronger first quarter, said David Sloan, economist at 4Cast Ltd in New York.
The U.S. economy grew at a 2.5 percent rate in the first quarter, but analysts do not expect that pace to last, with most anticipating the recovery is running at around 2 percent.
"The fact that fiscal policy is being tightened is preventing the recovery from accelerating into a strong one. It's just keeping the recovery at a relatively modest pace," said Sloan.
The day's data helped drive Wall Street lower, with the benchmark S&P 500 ending down nearly 1 percent.
Two separate reports on manufacturing also showed employment slowed in April as growth in the sector pulled back. Analysts said there was some risk Friday's larger employment report from the government could disappoint.
Financial data firm Markit said its final U.S. Manufacturing Purchasing Managers Index slipped to 52.1 from 54.6 in March. It was the lowest final reading since October.
That was echoed by a separate report from the Institute for Supply Management that showed the sector expanded only modestly, with its index coming in at 50.7, down from 51.3.
Readings above 50 indicate expansion. Regional reports also showed a slowdown in factory activity in April in some areas while some, including the Midwest, fell into contraction.
Another report showed construction spending fell 1.7 percent to an annual rate of $856.72 billion, the lowest since August, according to the Commerce Department. The drop could cause the first-quarter economic growth estimate to be trimmed from a first reading of 2.5 percent.
Demand for cars also waned in April, with U.S. auto sales slowing to their lowest monthly pace since last fall.
Focus will turn to Friday's jobs report from the Labor Department, which is expected to show overall nonfarm payrolls increased by 145,000, an improvement over the paltry 88,000 seen in March. Private payrolls are expected to have risen by 160,000.
Underlying jobs growth is now likely around 125,000 a month, Zandi said, down from what looked like a pace of 175,000 at the beginning of the year. March private payrolls from ADP were revised down to an increase of 131,000 from the previously reported 158,000.
Economists sometimes tweak their payrolls forecasts following the ADP report, though the private-sector report does not always accurately predict the government figures.
Since ADP overhauled its employment report late last year, it has missed the government figures by an average of 40,000 a month in either direction, according to Jim O'Sullivan, chief U.S. economist at High Frequency Economics.
That is better than the 58,000 average miss in the previous 12 months, but with only six months' worth of the new ADP report, the history is not yet conclusive, said O'Sullivan.
(Additional reporting by Richard Leong in New York and Lucia Mutikani in Washington; Editing by Dan Grebler)