In June, U.S. companies experienced a more pronounced slowdown in job growth than anticipated, signaling a cooling labor market amidst rising interest rates. The ADP National Employment Report, released on Wednesday, revealed that businesses added 150,000 jobs in June. This figure fell short of the 160,000 jobs expected by economists surveyed by Refinitiv and was down from a revised total of 157,000 jobs in May.
Simultaneously, the report highlighted a slight deceleration in wage growth, a significant factor in inflation dynamics. Wage growth slowed to 4.9%, marking the slowest rate since August 2021. For workers switching jobs, wages increased by 7.7%, a marginal decline from the 7.8% rise recorded in May.
The job growth was predominantly within the services sector, with goods-producing industries adding only 14,000 jobs. The hospitality and leisure sector led the gains, contributing 63,000 new jobs. Beyond this sector, job growth was tepid, with the construction industry adding 27,000 jobs and professional and business services increasing by 25,000 positions.
Conversely, some sectors experienced notable declines. The natural resources and mining sector lost 8,000 jobs, and manufacturing saw a reduction of 5,000 jobs. “Job growth has been solid, but not broad-based,” remarked Nela Richardson, ADP’s chief economist. “Had it not been for a rebound in hiring in leisure and hospitality, June would have been a downbeat month.”
The weaker-than-expected job growth report comes in the context of the Federal Reserve’s aggressive monetary tightening campaign, which has pushed interest rates to their highest levels since 2001. Wall Street is closely monitoring the labor market for signs of cooling, which would indicate that the Fed might soon shift towards reducing interest rates.
Federal Reserve officials have suggested that rate cuts could commence later this year, contingent upon more substantial evidence of inflation easing towards their 2% target. This ADP report precedes the more closely scrutinized June jobs report from the Labor Department, expected on Friday morning. Economists forecast that the Labor Department’s report will show a gain of 190,000 jobs for June, following an increase of 272,000 jobs in May, with the unemployment rate expected to remain steady at 4%.
It’s important to note that ADP’s numbers often differ significantly from the official government figures and have historically been an unreliable predictor of future trends. Nonetheless, this ADP report provides an early indication of a labor market adjusting to the Federal Reserve’s policy measures.
The Federal Reserve’s rate hikes aim to temper inflation by cooling down the economy, including the labor market. Higher interest rates typically reduce borrowing and spending, leading to slower economic growth and, consequently, a slower rate of job creation. The observed slowdown in job growth and wage increases in June aligns with the Federal Reserve’s objectives, yet also highlights the delicate balance policymakers must strike between curbing inflation and sustaining economic growth.
The hospitality and leisure sector’s significant job gains suggest a robust recovery in areas hit hardest by the pandemic. This sector’s resurgence has been crucial in maintaining overall job growth, but reliance on one sector indicates potential vulnerabilities in the broader labor market.
Other sectors showed mixed results, with construction and professional services showing modest growth, while declines in natural resources, mining, and manufacturing reflect challenges faced by these industries. These sectoral discrepancies point to an uneven recovery, with certain areas struggling more than others amid the current economic climate.
As the Federal Reserve continues its vigilant watch over inflation and economic indicators, the coming months will be critical in determining whether the labor market’s cooling trend will persist and how it will influence future monetary policy decisions. The upcoming Labor Department report will offer further insights into the state of the U.S. labor market, providing a clearer picture of the nation’s economic trajectory.
In summary, the June ADP National Employment Report underscores a notable slowdown in job growth, highlighting the ongoing impact of higher interest rates on the labor market. While certain sectors continue to recover robustly, others face declines, presenting a mixed picture of economic health and setting the stage for crucial policy decisions in the months ahead.
