ADP Employment Change: Goods out produces services for the first time since 2018

The latest ADP Employment Change report for February 2025 revealed that private-sector employment increased by 77,000 jobs, a significant slowdown from January’s 183,000 gain and well below the expected 140,000. This marks the smallest job gain since July 2024, signaling a potential deceleration in hiring momentum as businesses navigate policy uncertainty and weakening consumer spending. ADP's Chief Economist, Nela Richardson, noted that employers appear hesitant to hire, reflecting broader concerns about economic conditions.

Sector Breakdown: Goods vs. Services Diverge

Hiring trends diverged sharply across industries, with goods-producing sectors adding 42,000 jobs, while services-producing sectors saw a muted 36,000.

- Goods-Producing Sectors:

- Construction: +26,000

- Manufacturing: +18,000

- Natural Resources/Mining: -2,000

- Service-Providing Sectors:

- Leisure & Hospitality: +41,000 (Strongest service sector growth)

- Professional & Business Services: +27,000

- Financial Activities: +26,000

- Trade, Transportation & Utilities: -33,000 (Largest sector loss)

- Education & Health Services: -28,000

- Information: -14,000

The goods-producing sector continued to show resilience, with construction and manufacturing leading job gains, likely supported by ongoing infrastructure projects and corporate investment in industrial production. On the other hand, trade, transportation, and education sectors lost jobs, reflecting softer demand and possible cost-cutting measures by employers.

Wage Growth Holds Steady, But Job Changers See Slower Gains

Pay growth remains a critical focus for Federal Reserve policymakers as they assess inflationary pressures. According to ADP’s Pay Insights report, annual pay growth for job-stayers held steady at 4.7 percent, while job-changers saw a slight slowdown to 6.7 percent from 6.8 percent in January.

- Goods Sector Pay Gains:

- Construction: 4.9 percent

- Manufacturing: 4.8 percent

- Natural Resources/Mining: 4.4 percent

- Service Sector Pay Gains:

- Financial Activities: 5.1 percent

- Education & Health Services: 4.9 percent

- Trade, Transportation & Utilities: 4.4 percent

- Information: 4.2 percent

Notably, smaller businesses continue to struggle with wage growth, with firms having 1-19 employees seeing just a 2.8 percent increase in annual pay, compared to 5.0 percent at large firms (500+ employees). This suggests larger corporations may have more pricing power and financial flexibility to retain talent in a competitive job market.

Labor Market Momentum and Market Implications

This ADP report comes at a time of increased scrutiny over the health of the U.S. labor market. The weaker-than-expected job growth raises concerns about whether the economy is entering a slowdown, especially given the recent fluctuations in ADP data:

- January 2025: +183K (above expectations)

- December 2024: +122K (missed expectations)

- October 2024: +233K (significant beat)

The volatile nature of ADP prints in recent months suggests that hiring demand is cooling, which could influence the Federal Reserve’s next policy decisions. While markets expect 50 basis points of rate cuts this year, this report may increase pressure on the Fed to ease monetary policy sooner if labor weakness persists.

Fed & Market Reaction: Will This Impact Rate Cut Expectations?

The Federal Reserve has remained cautious about its rate-cut timeline, but a weakening labor market could force a reconsideration of its stance. The February report reinforces hiring hesitancy among businesses and raises questions about whether higher interest rates are weighing on labor demand.

Market participants will also be watching Friday’s Nonfarm Payrolls report, which often provides a broader and more detailed look at employment trends. If NFP shows a similar slowdown, it could strengthen the case for earlier Fed rate cuts and weigh on the U.S. Dollar Index (DXY), which is already trading near key support levels.

Final Thoughts: A Warning Sign or Just a Soft Patch?

The February ADP report adds to the growing debate over the U.S. labor market's resilience. While some industries—particularly construction, financial activities, and professional services—continue to see strong hiring, the broader slowdown in job creation suggests businesses are pulling back amid economic uncertainty.

With wage growth holding steady but slowing for job changers, inflation concerns may take a backseat to employment risks in upcoming Federal Reserve discussions. Investors will now shift their focus to the Nonfarm Payrolls report and any signals from the Fed on potential shifts in monetary policy.