Worst ADP Print Since 2023: Is the Fed Now Trapped Into a Cut?

The economic data released Wednesday delivered the clearest signal yet that the U.S. labor market—long the backbone of Fed hawks—is finally buckling in a way that gives the central bank political and analytical cover for another 25-basis-point cut next week. The standout was unquestionably the ADP report , which showed a stunning decline of 32,000 private-sector jobs versus expectations for a gain of 10,000. That headline would be alarming enough, but the structural breakdown underneath is what really matters: small businesses—the engine of Main Street hiring—shed 120,000 jobs, the worst drawdown since March 2023. Firms with 50 or more employees actually added jobs, gaining 90,000. This was not a broad, even slowdown. This was pain disproportionately concentrated in the core of the U.S. small business ecosystem.

This timing matters. The ADP print is the last labor reading the Fed will receive before its December 9–10 meeting. The official BLS payrolls report—normally the sharper instrument—won’t arrive until December 16 due to the shutdown delay. That means the Fed is heading into its decision with incomplete data—and the weak ADP number, particularly the stress among smaller employers, will likely carry more weight than usual. Until now, the Fed has been able to argue that the labor market was “cooling” rather than softening. Today’s report shifts the tone: the market isn’t cooling—it’s cracking along the margins.

Nela Richardson at ADP captured the mood succinctly, noting that “November’s slowdown was broad-based, led by a pullback among small businesses,” and further acknowledging an “uncertain macroeconomic environment.” That uncertainty is precisely the kind of phrasing Fed officials use when laying the groundwork for policy easing.

But the ADP report wasn’t the only economic release today—just the loudest. The ISM Services report showed the non-manufacturing PMI at 52.6, modestly above expectations and still in expansion territory. Business activity rose slightly, and new orders remained positive, though the latter did slip meaningfully. The employment component, however, remained in contractionary territory at 48.9—even with a slight uptick from October. Companies in the services sector are not adding workers; at best, they are replacing attrition. At worst, they are quietly trimming headcount before layoffs get reflected in the headline metrics.

The prices-paid index within ISM, a key inflation proxy, fell sharply to 65.4, a seven-month low. This suggests disinflationary pressure—notably within the largest portion of the U.S. economy. Combined with today’s import-export price data—both of which came in flat for the month—the market received yet another reinforcing signal that inflationary pressures are fading rather than reaccelerating.

Even petroleum import prices declined by 1.5% in November, offering further relief on the cost side. Wage growth slowed as well, with pay for job-stayers rising only 4.4%, down from 4.5% in October. That’s still elevated—but it’s pointed in the right direction for the Fed.

Industrial production and capacity utilization data reinforced the message of stagnation: the recovery in output is tepid, manufacturing is flat, and capacity remains under-engaged. There is no sign of a demand-driven overheating, and no sign of an industrial rebound that would pressure prices higher in the short term.

Layer on top of all this a rumbling political subplot: a report today suggested that former President Trump may be wavering on his reported intention to appoint Kevin Hassett as the next Fed Chair. Whether this is strategic ambiguity or genuine reconsideration is unclear. But markets trade on expectations—and today’s data weakens the case for a hawkish successor, strengthening the argument for a Chair whose mandate would tilt toward employment support rather than inflation vigilance.

The path forward for the Fed next week seems almost assured: a 25-basis-point cut, with futures markets pricing nearly a 90% probability. The real question now is the tone of the message. Before today, many expected Powell to cut—but accompany it with a cautionary, inflation-minded warning that the Fed may now pause to reassess the trend. Today’s data gives him latitude to soften that messaging, or at least portray the cut not as a tactical easing, but as a necessary intervention to protect employment.

The market reaction was immediate but measured: small-cap stocks, which benefit disproportionately from easing financial conditions, surged more than 1%, with homebuilders jumping even more aggressively. Rate-sensitives saw relief, and equities broadly firmed on the assumption that the Fed now has a clearer runway to stay supportive.

The bottom line: today’s macro data didn’t just justify a cut—it practically begged for it. The real drama lies not in the rate decision itself, but in whether Powell adjusts the rhetorical stance that has kept markets anxious and cautious. If labor softness continues into December and January—as today suggests is likely—the coming pivot could arrive faster and more firmly than the Fed previously signaled.