Fed Watch- 25 or 50 bps? ADP miss provides tailwind for 50 bps camp

The ADP National Employment Report for August 2024 revealed a significant miss in job creation, with private employers adding just 99,000 jobs, well below market expectations of 144,000. This marks the fourth consecutive month of weaker-than-expected job growth and the first sub-100,000 reading since September 2023, underscoring a noticeable slowdown in the labor market. The deceleration is particularly striking after two years of robust post-pandemic expansion, suggesting that the labor market is entering a more subdued phase.

The numbers will be a feather in the cap for the 50 basis point camp as we continue to see a cooling in the labor market. CME Fed Fund Futures show a 57% chance that the Fed will move 25 bps on September 18. This is down from 66% one week ago. We will monitor any changes throughout the course of the day.

Sector performance varied, with goods-producing industries adding 27,000 jobs, driven by strength in construction (+27,000) and natural resources/mining (+8,000), while manufacturing shed 8,000 jobs. Service-providing industries added 72,000 jobs, with notable gains in education/health services (+29,000) and financial activities (+18,000). However, sectors such as professional/business services (-16,000) and information (-4,000) saw job losses. The mixed results reflect a broader trend of cooling across various sectors, with the services sector maintaining some resilience but not enough to offset weaknesses elsewhere.

A key factor to watch going forward is wage growth, which has stabilized after a rapid post-pandemic surge. In August, pay gains for job-stayers remained steady at 4.8% year-over-year, while job-changers saw a 7.3% increase. These figures suggest that wage pressures are moderating, which could provide some relief to inflation concerns but also signals a potential slowdown in consumer spending as wage growth plateaus.

By establishment size, medium-sized businesses (50-499 employees) led job creation with 68,000 positions added, followed by large establishments (500+ employees) with 42,000 jobs. Small establishments, however, saw a decline of 9,000 jobs, driven by losses among businesses with 20-49 employees. This divergence highlights ongoing challenges for smaller businesses, which may be more sensitive to economic headwinds and rising costs.

In conclusion, the August ADP report indicates a significant slowdown in hiring, missing expectations by a wide margin and reinforcing concerns about the cooling labor market. This data could bolster the argument for more aggressive Federal Reserve action, with a potential 50 basis point rate hike on the table as policymakers respond to weakening job growth and moderating wage pressures. The next few months will be critical in determining whether this softening trend continues or if hiring stabilizes.