Government Spending Cuts Contribute to Slower Growth Brendan Smialowski/Agence France-Presse - Getty Images Government employees protesting spending cuts. The jobs report to be released Friday is expected to be affected by the cuts. Michael Kelly let go of another employee last month. As chief executive of a small Michigan military contractor, Nanocerox, he had already cut his work force by one-third. But it was not enough. And if the government spending cuts mandated by Congress continue, he said, more people will go in the coming months. The squeeze Mr. Kelly is facing is one reason markets are jittery about what the Labor Department's latest report on unemployment and job creation will reveal about the economy on Friday. After a strong start to the year, several economic indicators beginning in March have pointed to much slower growth, largely because of the fiscal headwinds from Washington, economists say. Job cuts like the kind at Nanocerox remain the exception, rather than the rule. On Thursday, the government said weekly unemployment claims were at a five-year low. The problem is that companies have not been hiring. This week, a survey of private sector hiring in April came in well below expectations, while indications for everything from retail sales to manufacturing have also been soft recently. Whatever the data ultimately show for April, economists like Diane Swonk, chief economist for Mesirow Financial in Chicago, say the economy would be showing much more momentum if it were not for the combination of higher payroll taxes that went into effect in January, as well as the process of automatic spending cuts known as sequestration that began to bite last month. What's the biggest drag on the economy? The government," Ms. Swonk said. If the government simply did no harm, we could be at escape velocity. Without the impact of federal cuts and higher taxes, Ms. Swonk estimates, annual economic growth would be close to 4 percent, above the 2.5 percent pace she is expecting in 2013. Like most economists, Ms. Swonk says she does not think the economy will fall back into recession or experience a pronounced rise in unemployment. Instead, economists on Wall Street are looking for the economy to have created 140,000 jobs in April, below average compared with the monthly rate of 168,000 jobs added in the first quarter but better than the 88,000 jobs created in March. The unemployment rate is expected to remain at 7.6 percent. That's down considerably from the 10 percent peak in unemployment recorded in October 2009, but still well above where levels for joblessness should be this far into a recovery. Nearly 12 million Americans are unemployed and looking for work, according to the Labor Department, and almost 40 percent of them have been jobless for more than six months. As long as the unemployment rate remains above 6.5 percent, the Federal Reserve has vowed to keep buying tens of billions of dollars worth of bonds each month to help stimulate growth. That has buoyed Wall Street, and helped the stock market reach record highs, but it has yet to translate into the kind of job gains the Fed wants to see. Other central banks have been getting into the act, too. The European Central Bank cut rates on Thursday in a bid to restore growth, and the Bank of Japan recently started an aggressive stimulus effort. In particular, economists will be watching Friday's report to see if the manufacturing sector shed more jobs in April. The government is generally furloughing employees rather than laying them off, but private contractors that supply the Pentagon have been trimming their work forces outright. Julia Coronado, chief North American economist at BNP Paribas, predicted the impact of the sequester would increase in the months ahead. "We've seen orders for defense-related goods really slow down," she said. There are definitely signs of a cooling. "We're not in a free fall," she added, "but it highlights the difficult nature of this recovery." Although sequestration did not officially go into effect until March, the Pentagon and some other agencies began cutting back last year. At Mr. Kelly's company, Nanocerox, that has meant a sharp slowdown in orders for powder derived from rare-earth minerals that is used in a wide range of high-technology products, like advanced lasers and air-to-air missiles. With just $2.5 million in revenue, the company, based in Ann Arbor, Mich., had to react quickly as demand from the Pentagon and big contractors like Raytheon evaporated. "It's a tough, tough environment," Mr. Kelly said. We're trying to sell the company. It's sad because our technology is the next generation for the military.