(ADP report updated with analyst commentary, additional information)

NEW YORK ( TheStreet) -- Companies created far fewer jobs than expected in May, as the economic recovery showed signs of losing momentum.

According to ADP's May Employment Report, the private sector added 38,000 jobs in May on a seasonally adjusted basis. That was well below consensus estimates of 170,000.

The report also revised downwards the estimated change from March to April to 177,000 from 179,000.

"A deceleration in employment, while disappointing, is not entirely surprising," the report said. "In the first quarter, GDP grew at only a 1.8% rate and only about 2¼% over the last four quarters. This is below most economists' estimate of the economy's potential growth rate and normally would be associated with very weak growth of employment."

The services producing sector created 48,000 jobs, marking 17 consecutive monthly gains in employment. The goods-producing sector shed 10,000 jobs while manufacturing employment fell for the first time in seven months, declining by 9,000.

Large companies who employ more than 500 workers shed 19,000 jobs, while small and medium sized businesses added 27,000 jobs and 30,000 jobs respectively.

While the ADP is not always an accurate predictor of nonfarm payrolls additions, economists are likely to lower their estimates for jobs in May based on this starkly weaker report.

Ian Shepherdson, chief U.S. economist at High Frequency Economics notes: "As always, ADP could be wrong; it is the least bad indicator of payrolls but it is not reliable in every month. As it stands, though, we have to pull down our forecast for Friday's official private payroll number to about 75,000 from our previous estimate of 175,000. As far as we can tell, employers have hugely over-reacted to the surge in oil prices, which has slowed but not killed consumption."

Patrick O'Keefe, director of economic research at J.H. Cohn said that while there were some seasonal factors that may have been at work in the recent claims data and in the ADP estimates, the report was still disappointing. "We can put away our balloons and party hats today," he said. "We expected a pull back in the rate of acceleration, instead we got deceleration. It appears that the general expansion has lost a bit of momentum and employment numbers, which were already lethargic, are slowing further."

Futures were down following the report. The SPDR Dow Jones Industrial Average ETF ( DIA) was losing 0.3%, while the SPDR S&P 500 ETF ( SPY) and the PowerShares QQQ ( QQQ) were down by 0.4% and 0.3% respectively.

-- Written by Shanthi Bharatwaj in New York

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