Summary of Key Points
In July, private sector hiring in the United States declined significantly (ADP data showed only a gain of 44,000 jobs, far below expectations and previous figures). The service industry was the only sector showing growth, while the goods production sector saw a decrease. At the same time, companies' willingness to hire is low (the ISM Service Industry Index shrank). These numbers provide insights into Friday's non-farm payroll report and have sparked discussions about the Federal Reserve's interest rate hike decisions. There are internal divisions within the Fed; markets expect a high probability of a hike this year, but institutions differ on the number of hikes and the timing. The labor market's trend of slow hiring and layoffs is making the Fed more focused on inflation.
Detailed Analysis
1. ADP Data: A Surprisingly Weak Performance
In July, private employers in the U.S. added only 44,000 jobs, less than half of the revised 95,000 in June and falling short of market expectations of 75,000.
- Sector Divergence: The service industry was the only sector to hire (adding 47,000 jobs), with the education and healthcare sectors being the most active (36,000 new hires). The finance and professional services sectors also added some jobs, while the goods production sector lost 3,000 positions (e.g., trade and transportation, mining industries were contracting).
- Company Size: Small companies (with fewer than 50 employees) contributed the most to job growth (23,000 new hires), indicating that small business owners are still hiring, but larger corporations may be more cautious.
- Salary Changes: Salaries for existing employees increased by 4.4%, while those changing jobs saw a 7% increase (the highest since August 2025). This suggests that some sectors still have a shortage of workers, but the overall pace of hiring has slowed down.
2. Three Reasons for the Slowdown in Hiring
- The Impact of the World Cup: ADP officials mentioned that temporary staffing reductions occurred in certain industries during the World Cup (e.g., catering and retail), and employees taking time off affected the hiring process.
- Cost Pressures: ISM data shows that shortages of materials and high inflation have increased business costs, prompting companies to hire fewer workers to save money.
- The Role of AI: Economists at Pantheon Macro believe that AI has improved the efficiency of existing employees, leaving companies unsure about their future staffing needs and hesitant to hire new ones. In other words, AI is helping employees do more work, reducing the need for additional hires.
3. ISM Data Supports the Slowdown Trend
The ISM Service Industry Index, released on the same day, continued to show expansion (54.1, above 50 indicates growth), but the employment sub-index fell below 50 (the threshold for contraction), for the fourth time in the past five months. This suggests that most service industry companies, except for healthcare, are reluctant to hire new employees. Industries such as restaurants and retail are either experiencing mediocre business or high costs, preventing them from adding staff.
4. Possible Outlook for Friday’s Non-Farm Payroll Report
ADP data serves as a preview of the non-farm payroll report, but they cover different scopes: ADP only includes private employers, while the non-farm report also includes government agencies.
Wall Street expects a gain of 83,000 jobs in the non-farm report and a unemployment rate of 4.2%, although the unemployment rate may rise slightly. A recent survey shows that the proportion of consumers who believe there are plenty of job opportunities has dropped to its lowest level since February 2021, indicating that job seekers may feel fewer opportunities available.
5. The Fed’s Interest Rate Hike Decision: Uncertain
Will these employment numbers affect the Fed’s interest rate decisions?
- Internal Disagreements: Some officials (e.g., Kashkari) want to start raising rates gradually in September, while others (e.g., Paulson) suggest waiting for more data. Still, some (e.g., Williams) say action will depend on whether inflation declines.
- Market Expectations: Futures trading indicates a high probability of a rate hike this year (80%).
- Divergent Views from Institutions: Bank of America predicts three hikes starting in September, Danske expects one in December and another in March next year, while Goldman Sachs and Barclays do not anticipate any hikes.
- Key Factor: The labor market’s current trend of slow hiring and layoffs means that the Fed is more focused on controlling inflation. However, if employment data continues to be weak, it may temper the hawks’ enthusiasm for raising rates.
Overall, the U.S. job market is cooling down, which will make the Fed more cautious about raising interest rates. Whether inflation can be brought under control is the decisive factor in determining the timing of any hikes. Friday’s non-farm payroll report will provide an important window into future policy directions.