As looming interest rate hikes fuel uncertainty over the economic recovery, private U.S. employers posted their worst monthly job growth in more than two years on Thursday, according to payroll processor ADP, which notes that prolonged inflation and the resulting central bank policy could be starting to temper growth in the red-hot labor market.

Key Facts

Dragged down by 91,000 lost jobs among small businesses, private employment increased by 128,000 jobs from April to May, according to the ADP’s National Employment Report released Thursday—the slowest pace since Covid lockdowns led to widespread unemployment in April 2020 and far below economist projections calling for 300,000 new jobs.

The rate of hiring has “tempered across all industries,” ADP Chief Economist Nela Richardson said in a Wednesday statement, calling small businesses in particular a “source of concern as they struggle to keep up with larger firms that have been booming as of late.”

Job loss was worst among businesses with less than 20 employees, which saw employment fall by 78,000 workers in April, while medium businesses and large businesses added 97,000 and 122,000 jobs, according to ADP.

In another sign of weakness, ADP revised its estimate for the number of private-payroll jobs added in April to 202,000 from 247,000, with Richardson pointing to the tight labor market and elevated inflation as main catalysts for weakness.

In emailed comments, analyst Adam Crisafulli of Vital Knowledge Media called the report “bad for the economy, but good for markets,” noting the moderation in job creation, which tends to fuel inflation, is likely to put the Federal Reserve at ease as it continues raising interest rates.

What To Watch For

The Labor Department’s monthly jobs report, which tracks employment across the public and private sectors, is slated for release Friday morning. Economists forecast the U.S. added 328,000 jobs last month, down from 428,000 in April.


Key Background

After losing more than 20 million jobs at the height of pandemic uncertainty in the spring of 2020, the labor market has quickly and forcefully led the economic recovery. “In the face of rising uncertainty, the U.S. economy continues to add jobs at a remarkable rate,” Morning Consult chief economist John Leer said of jobs data released last month, though he also cautioned that the growth will be hard to maintain as the Fed raises interest rates in the next few months. The threat of rising interest rates, which tend to hurt company earnings, has battered the stock market in recent weeks, pushing the tech-heavy Nasdaq down more than 24% for the year.

What To Watch For

Last month, Fed Chair Jerome Powell called the “robust” labor market a bright spot for the economy as he instituted the largest interest rate hike in 22 years to help cool inflation, which has been rising at the highest rate since December 1981. In a note to clients, Bank of America economist Ethan Harris said the key risk to the economy is that inflation remains elevated next year. “Recession risks are low now, but elevated in 2023 as inflation could force the Fed to hike until it hurts,” he said.

Further Reading

US Added 428,000 Jobs In April—Beating Expectations As Hot Labor Market Spurs Fed Rate Hikes (Forbes)


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