U.S. Private Hiring Slows Sharply in May, Fueling Fed Rate Cut Speculation

Private-sector job growth came to a grinding halt in May, according to the latest ADP National Employment Report, raising fresh concerns about the underlying strength of the U.S. labor market and amplifying expectations that the Federal Reserve may soon be compelled to lower interest rates. Employers added just 37,000 jobs last month, far short of the consensus estimate for a 140,000 increase and down sharply from April’s upwardly revised 60,000 figure. The weak report, the softest since March 2023, adds to the narrative that the labor market may be entering a more fragile phase amid persistent macroeconomic uncertainty and tariff headwinds.

The headline figure was especially concerning given that the ADP report often serves as a barometer ahead of the closely watched nonfarm payrolls report due Friday. In response to the print, President Trump posted a pointed message on Truth Social accusing the Federal Reserve of “moving too slow” on rate cuts and reiterating that “the American worker is being crushed by policy lag.” Market participants swiftly increased bets on a September rate cut, reinforcing the widely held expectation of 50 basis points in easing before year-end.

Drilling into the details, job growth was heavily concentrated in the service sector, which added 36,000 positions. However, this headline masks notable weakness in several key categories. Professional and business services shed 17,000 jobs, while education and health services declined by 13,000. The bright spots included leisure and hospitality, which added 38,000 positions, and financial activities, up 20,000. The information sector also saw a modest gain of 8,000.

In contrast, the goods-producing sector posted a net loss of 2,000 jobs, with declines in mining (-5,000) and manufacturing (-3,000) offsetting a modest gain of 6,000 in construction. These figures align with anecdotal evidence of softening demand and rising input costs stemming from newly imposed tariffs on key imports such as Canadian lumber and Mexican auto components.

By region, the report revealed pronounced divergences. The West led with 37,000 new jobs, driven largely by strength in the Mountain states. The Northeast shed 19,000 positions—16,000 of which came from New England—while the South was essentially flat. The Midwest gained a modest 20,000 jobs, helped by strong performance in East North Central states.

A particularly sobering component of the report was the breakdown by establishment size. Small businesses with fewer than 50 employees saw a combined decline of 13,000 jobs, continuing a multi-month pattern of hiring weakness. Large firms also contracted slightly, with a net loss of 3,000 positions. The lone standout was the medium-sized employer group, which added 49,000 jobs—suggesting that mid-market firms may be better positioned to weather the current environment.

Wage data offered a mixed but still elevated picture. Annual pay growth for job-stayers remained steady at 4.5% year-over-year, while pay for job-changers rose 7.0%, also unchanged from April. These figures continue to reflect a relatively tight labor market, despite the drop in hiring volume. By industry, financial services and leisure/hospitality led wage gains at 5.2% and 4.8%, respectively. Manufacturing, construction, and education/health services also saw solid wage growth in the 4.5%–4.6% range.

“After a strong start to the year, hiring is losing momentum,” said Nela Richardson, ADP’s chief economist. “Pay growth, however, was little changed in May, holding at robust levels for both job-stayers and job-changers.” Richardson’s commentary reflects a labor market that is no longer expanding uniformly but still showing resilience in wages—complicating the Federal Reserve’s policy calculus.

In market terms, the report was viewed as a potential inflection point. Treasury yields slipped modestly in the wake of the data, and futures pricing now indicates nearly 70% odds of a September rate cut, according to the CME FedWatch tool. Equities opened slightly higher as traders welcomed the increased likelihood of monetary easing, although gains were restrained by caution ahead of Friday’s official payrolls number.

The ADP release follows recent signals of softening macro conditions, including a decline in consumer confidence, downward revisions to GDP forecasts, and increased volatility in the manufacturing sector. Moreover, concerns about inflation remain prominent as new tariffs feed through to prices, even as the Fed remains cautious in its forward guidance.

Looking ahead, the May nonfarm payrolls report will serve as a key test. If Friday’s data confirms a marked slowdown in employment growth, pressure will intensify on the Fed to begin cutting rates—possibly as soon as the July meeting. Conversely, a surprise rebound could complicate the central bank’s efforts to fine-tune policy without reigniting inflationary pressures.

In summary, May’s ADP employment report sent a clear signal: the private sector is pulling back on hiring, and the once-resilient labor market is now showing more visible signs of fatigue. While wage growth remains strong, the sudden deceleration in job creation may force policymakers to pivot sooner than anticipated. With the next FOMC meeting just weeks away, all eyes now turn to Friday’s labor data for confirmation—or contradiction—of this emerging trend.