Private Sector Payroll Creation Tumbles to Lowest Level in Over Two Years, Putting Pressure on Friday's Nonfarm Report and Recession Risks

Private sector job creation slowed sharply in May, falling to its lowest level in more than two years, according to payroll processing firm ADP. The data deepens concerns over a weakening labor market and rising recession risks, increasing pressure on the Federal Reserve to consider rate cuts amid mounting trade uncertainty under President Trump.

ADP reported Wednesday that payrolls rose by just 37,000 in May—well below April’s downwardly revised 60,000 and far short of the 110,000 forecast by Dow Jones. It was the weakest monthly job gain in ADP’s data since March 2023.

The report lands just two days ahead of the more closely watched nonfarm payrolls report from the Bureau of Labor Statistics (BLS), which is expected to show a gain of 125,000 jobs and an unchanged unemployment rate of 4.2%.

“After a strong start to the year, hiring is losing momentum. Pay growth, however, was little changed in May, holding at robust levels for both job-stayers and job-changers,” said Nela Richardson, chief economist at ADP.

Goods-producing industries lost a net 2,000 jobs in May, with natural resources and mining down 5,000 and manufacturing down 3,000. These declines were partially offset by a 6,000 gain in construction.

In the services sector, leisure and hospitality (+38,000) and financial activities (+20,000) showed some strength. However, those gains were overshadowed by losses in professional and business services (-17,000), education and health services (-13,000), and trade, transportation, and utilities (-4,000).

Small businesses bore the brunt of the slowdown, with firms employing fewer than 50 workers shedding 13,000 jobs. Large companies (500+ employees) saw a decline of 3,000, while mid-sized businesses added 49,000.

Labor market indicators have been increasingly mixed. The BLS reported on Tuesday that job openings rose more than expected in April. However, surveys from job site Indeed and the National Federation of Independent Business point to waning hiring intentions and fewer open positions.

“I see the U.S. economy as still being in a solid position, but heightened uncertainty poses risks to both price stability and unemployment,” said Federal Reserve Governor Lisa Cook on Tuesday.

The Federal Reserve’s next policy meeting is set for June 17–18. While most economists currently do not expect a rate cut this month due to persistent trade-related uncertainty, the growing threat of labor market weakness could shift the Fed’s calculus—especially with recession fears gaining traction.