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Progress on the Job Front Will Be Slow, but Steady

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Even as federal budget cuts put the squeeze on government hiring, private employers are creating new jobs at a steady, but painfully slow, pace.

And despite a long list of concerns and uncertainties weighing on small businesses, the biggest supply of new jobs is coming from the nation's smallest companies. The government will offer up the latest tally this Friday with its jobs report for May.

Forecasters had been looking for a net gain of 190,000. But some economists began to pare back expectations after payroll processor ADP reported Wednesday private-sector businesses hired a lower-than-expected 135,000 people last month.

"It is reflective of the continuation of the soft patch that the economy has been going through, but looking forward it seems that we're starting to gain a little bit of traction," said Russell Price, a senior economist at Ameriprise Financial. "And most importantly that's been most evident in consumer spending and consumer attitudes."

The recent strength in consumer spending comes as households have pared down debt and built up savings, helped by rising stock and housing prices. That spending has helped offset the ongoing cuts in federal government outlays known as the sequester, which officially took effect in March.

(Read More: For Small Business, Things Finally Looking Up)

As those cuts have phased in, the impact on the overall economy has deepened. That's one reason some forecasters believe Friday's jobs report will show the pace of new job creation falling to the lower end of its recent range.

"The question is: Is it going north to 200,000 (jobs for the month) or is it going south to 150,000?" said Mark Zandi, chief economist at Moody's Analytics. "At the moment, the risks are that it's going to 150,000. And a lot of that is because of the fiscal issues."

Since early 2010, when employers slowly began reversing the mass layoffs of the Great Recession, the renewed hiring has come in fits and starts. But despite month-to-month swings—and subsequent revisions—private-sector employers have added an average of roughly 180,000 new jobs every month for the past three years.

That's much slower than the job creation which typically accompanies an economic recovery and it's one reason the jobless rate has been falling so slowly since the Great Recession ended in June 2009.

The high level of unemployment, with nearly 12 million American still out of work, also reflects the deep hole the economy fell into following the financial meltdown of 2008.

The contraction was so severe that, after five years, overall manufacturing production by all of the nation's factories has yet to reach pre-recession levels.

"There is still a lot of room to run in the manufacturing recovery," said Neal Soss, Credit Suisse's chief economist. "Even getting back to 2007 levels would be only a partial achievement since it would have been reasonable to expect some growth in the intervening years."

Much like the housing market, the job market is much stronger in some parts of the country than in others. This week's "beige book" regional economic report from the Federal Reserve, for example, found broad disparities in the pace of hiring from one Fed district to the next.

Overall, the pace of hiring was "modest to moderate" in mid-April, the report said. But demand for new hires is strong enough in the New York, Philadelphia, Richmond, Minneapolis, Kansas City and Dallas districts that some employers report trouble finding qualified people to fill job openings, according the Fed.

In the Boston District, on the other hand, "with only a few exceptions, businesses were not hiring much beyond replacement." In the Richmond and Atlanta districts, federal spending cuts are shrinking government staffing levels.

The pace of hiring also varied widely by industry. Demand remains strong for workers in information technology, health care and engineering, according to the Fed.

The pace of hiring has also picked up among small businesses, which accounted for more than 40 percent of new hires in May, according to the ADP survey.

(Read More: Just Do It; Six Things Small Businesses Should Do This Summer)

Some analysts and economists believe that widespread economic and political uncertainty have depressed small-business hiring. The added cost of providing workers' health care under the Affordable Care Act, which begins open enrollment this fall, is often cited as a disincentive for small-business hiring.

"The lack of leadership in Washington and the resulting uncertainty depresses consumers' and business owners' willingness to spend and invest, and make bets on the future," said Bill Dunkelberg, chief economist of the National Federation of Independent Business, in the group's latest survey of small-business hiring plans.

But the outlook apparently is improving for small businesses. The NFIB's April Index of Small Business Optimism rose 2.6 points to 92.1, just above the recovery average of 90.7.

In a separate survey by American Express, half of U.S.-based chief financial officers said they expect to increase headcount over the next year.

_By CNBC's John W. Schoen. Follow him on Twitter.

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