The U.S. labor market showed stronger-than-expected growth in September, with private sector payrolls increasing by 143,000, according to a report by payrolls processing firm ADP. This marked an acceleration from August's upwardly revised 103,000 and exceeded the consensus forecast of 128,000 jobs added. The data underscores the labor market's resilience despite signs of broader economic slowdown and suggests that employment conditions remain steady as the Federal Reserve continues to weigh its next moves on monetary policy.
While the job gains signal sustained hiring, there are also signs of a cooling in wage growth. The year-over-year pay increase for those staying in their jobs declined to 4.7%, while wage growth for job switchers fell to 6.6%, a 0.7 percentage point decrease from the previous month. These figures reflect a gradual moderation in the labor market after the post-pandemic hiring surge, which saw significant wage inflation as companies scrambled to fill positions.
The job gains in September were led by sectors such as leisure and hospitality, which added 34,000 jobs, construction with 26,000, and education and health services with 24,000. Professional and business services followed closely, contributing 20,000 new positions, while information services was the only sector to post a decline, losing 10,000 jobs. Service providers accounted for the bulk of the hiring, adding 101,000 jobs, while goods producers contributed the remaining 42,000.
A breakdown of the data shows that all of the employment growth came from larger companies, particularly those with more than 50 employees. Smaller firms, especially those with fewer than 20 workers, experienced a net loss of 13,000 jobs, highlighting the continued challenges faced by small businesses in a high-inflation and higher-interest-rate environment.
The ADP report is closely watched by investors and economists as a precursor to the U.S. Department of Labor's nonfarm payrolls report, which is scheduled for release on Friday. The government report is expected to show an addition of 150,000 jobs in September, following a weaker-than-expected increase of 142,000 in August. However, as the ADP and government reports often diverge, the official numbers could provide further clarity on the labor market's direction.
The labor market data comes at a critical time for the Federal Reserve, as policymakers assess the strength of the economy and consider future adjustments to interest rates. Fed Chair Jerome Powell recently described the labor market as "solid" but acknowledged that it has "clearly cooled" over the past year. This moderation in hiring and wage growth is likely to influence the Fed's upcoming decisions on rate cuts, with markets now expecting a series of smaller, quarter-point cuts rather than the larger half-point reductions initially anticipated.
Futures markets have adjusted their expectations accordingly. Traders are now pricing in a 34% probability of a 50-basis-point rate cut in November, down from 57% just a week ago, according to the CME Group's FedWatch Tool. This shift reflects the market's recalibration in response to both the strong payrolls report and Powell's recent remarks, which suggested that gradual, smaller rate cuts might be the more likely course of action as inflationary pressures ease.
In the currency markets, the stronger-than-expected jobs data provided a boost to the U.S. dollar. The dollar index, which measures the greenback against a basket of six major currencies, rose to 101.58 on Wednesday, its highest level since mid-September. The euro fell to $1.1043, marking a three-week low, as concerns over the European Central Bank's potential rate cuts amid slowing inflation weighed on the single currency.
"The ADP number looked pretty good and points to a decent nonfarm payrolls print on Friday," said Brad Bechtel, global head of FX at Jefferies in New York. He noted that the data contributed to increased optimism about the U.S. economy and lessened expectations for aggressive rate cuts by the Fed.
In addition to domestic economic factors, geopolitical tensions in the Middle East added complexity to the markets. Traders are closely monitoring developments after Israel was attacked by Iran in a strike that raised concerns about potential disruptions to oil supplies from the region. Despite the tensions, demand for safe-haven currencies like the yen and Swiss franc eased slightly, with the dollar gaining ground against the yen, rising to 145.73 from 143.57 on Tuesday.
