Private sector hiring rose by just 37,000 in May, the lowest in more than two years, ADP says

The ADP National Employment Report indicated a significant slowdown in private sector job creation for May, with only 37,000 jobs added, substantially below the expected 110,000 and the lowest figure since March 2023, signaling a potential weakening in the labor market. While leisure and hospitality and financial activities showed some strength, losses in professional and business services, education and health services, and trade, transportation, and utilities weighed on the overall total. This report precedes the Bureau of Labor Statistics' nonfarm payrolls count and adds to the mixed signals regarding the labor market, with Federal Reserve officials expressing concerns about potential impacts from tariffs on inflation and employment.

Analysis

Private sector job creation decelerated sharply in May, with ADP reporting a net increase of only 37,000 positions, significantly below the Dow Jones consensus of 110,000 and a downwardly revised 60,000 in April. This marks the lowest monthly job gain since March 2023, indicating a notable loss of momentum in hiring as described by ADP's chief economist, Nela Richardson, and contributes to a moderately negative sentiment surrounding labor market health. The weakness was pronounced in goods-producing industries, which shed a net 2,000 jobs, driven by declines in natural resources and mining (-5,000) and manufacturing (-3,000), partially offset by a gain of 6,000 in construction. Within services, leisure and hospitality (+38,000) and financial activities (+20,000) showed resilience, but these were counteracted by significant losses in professional and business services (-17,000), education and health services (-13,000), and trade, transportation, and utilities (-4,000). Job losses were observed in companies employing fewer than 50 workers (-13,000) and those with 500 or more employees (-3,000), while mid-size firms (50-499 employees) were the sole source of net job gains (+49,000). Despite the hiring slowdown, wage growth remained robust, with annual pay increasing 4.5% for job stayers and 7% for job changers, figures largely unchanged from April. This ADP report, arriving two days before the more closely watched Bureau of Labor Statistics nonfarm payrolls data (expected at 125,000), adds to an uncertain and mixed labor market picture, where Tuesday's BLS job openings data showed an unexpected rise, yet other indicators suggest weakening conditions. Federal Reserve officials have expressed concern about uncertainties, including potential tariff impacts on inflation and employment, but are anticipated to keep interest rates unchanged at their upcoming meeting.

Key Decisions for Investors

• Investors should closely monitor the upcoming Bureau of Labor Statistics nonfarm payrolls report to assess whether it confirms the significant slowdown indicated by ADP, which would heighten concerns about economic deceleration.
• Consider reviewing portfolio allocations, potentially reducing exposure to sectors most sensitive to a cooling labor market, such as discretionary consumer spending tied to broad employment, while observing if niche strengths in sectors like leisure/hospitality and financial activities persist.
• Pay heightened attention to Federal Reserve communications for any shifts in tone regarding labor market conditions and their potential influence on future monetary policy, especially if further data confirms a weakening trend.
• Evaluate the impact of persistent robust wage growth alongside slowing job creation on corporate profit margins and inflation expectations, as this dynamic could pose challenges for certain industries.