By Leah Schnurr
NEW YORK (Reuters) - Companies hired at the weakest pace in five months in March as recent strong demand for construction jobs evaporated, while growth in the vast services sector slowed, signs that the economic recovery could be hitting a soft patch.
The ADP National Employment Report said on Wednesday that private employers added 158,000 jobs last month, falling short of economists' expectations for 200,000 new jobs. The hiring was below the lowest estimates in a poll by Reuters and was the smallest gain since October.
A separate report on the health of the services sector, which dominates the economy, also showed employment growth pulled back in March, stirring concerns that the government's closely watched monthly labor market report due out on Friday could miss expectations.
Upbeat data in recent months, including on the labor market, has suggested the economy picked up in the first quarter after growing at a weak 0.4 percent rate in the fourth quarter of last year.
But Wednesday's reports suggested the first quarter may have ended on a softer note, as did data on Monday showing that growth in factory activity cooled in March. Economists said the slowdown in those areas could lay the foundation for weaker growth in the current quarter.
"That's been the process this whole recovery - you get one strong quarter and then things start to slow down again," said Scott Brown, chief economist at Raymond James in St. Petersburg, Florida.
Although there has been little sign of an impact to the economy from the federal government's $85 billion in spending cuts that started to take effect in March, economists say it could start to show up as the year progresses.
"It looks like activity may have slowed down from the higher pace at the start of the year," said Sam Bullard, senior economist at Wells Fargo in Charlotte, North Carolina.
"If we do see a pullback, it's probably not going to be all that surprising given the headwinds we have in front of us."
Those concerns will likely keep the Federal Reserve's loose monetary policy in place as the central bank works to boost the economy through its quantitative easing program.
The day's data hit financial markets, pulling U.S. stocks lower. Still, the benchmark S&P 500 index remained within striking distance of an all-time intraday high.
The pullback in March hiring seen in the ADP report was largely due to a slowdown in construction job growth after showing strength in recent months, said Mark Zandi, chief economist for Moody's Analytics, which jointly develops the ADP report. There were zero new construction jobs in March.
Recent monthly gains in the construction sector have averaged about 35,000, Zandi said, as the housing recovery has gained traction. Hiring may also have been boosted in the short-term by rebuilding efforts following the massive storm that hit the U.S. northeast in the fall of last year, he said.
"If that's the case, underlying job growth is not changed appreciably," said Zandi, estimating overall employment growth is running at around 175,000 a month.
Revisions to February's jobs gains were more positive, with the private payrolls figure raised to an increase of 237,000 from the previously reported 198,000, although January was revised down to 177,000 from 215,000.
The ADP report comes ahead of the government's more comprehensive labor market report due on Friday.
That report is expected to show 200,000 jobs were created last month. Economists said Wednesday's data could add some downside risk to their forecasts, though they cautioned the ADP report is not always an accurate predictor.
Jim O'Sullivan, chief U.S. economist at High Frequency Economics, lowered his estimate for Friday's payrolls to 160,000 from 215,000.
A report from The Institute for Supply Management showed the pace of growth in the U.S. services sector slowed in March to the lowest level in seven months, with the ISM index falling to a reading of 54.4 from 56 in February. A reading above 50 indicates expansion in the sector.
The forward-looking new orders index slipped to 54.6 from 58.2, while employment dropped to its lowest level since November at 53.3 from 57.2.
Still, the service sector has been more resilient than its manufacturing counterpart and has held above the 50 level on the index indicating expansion since the beginning of 2010.
(Additional reporting by Richard Leong; Editing by Leslie Adler)