According to the January 2024 ADP National Employment Report, private sector employment increased by only 107,000 jobs in January, falling far short of economists’ expectations of a 145,000 job gain. This sharp deceleration in hiring highlights growing concerns that the labor market is cooling as the economy faces heightened uncertainty.
Hiring Slows Across Industries
The ADP report showed broad-based declines in private sector hiring last month, with weakness visible across industries. Service-providing jobs rose 94,000 while goods producers added 13,000 positions:
| Industry | Job Gains |
|---|---|
| Trade/transportation/utilities | 27,000 |
| Professional/business services | 21,000 |
| Leisure and hospitality | 15,000 |
| Manufacturing | 8,000 |
Paul Ashworth, chief North America economist at Capital Economics, noted that aside from the big miss compared to forecasts, “There are no redeeming features in this report.” Employment in key areas like professional and business services came in well under seasonal norms.
Small firms with less than 50 employees lost 91,000 positions, while medium and large companies gained 117,000 and 81,000 jobs respectively.
Recession Fears on the Rise
Some economists warn that slower job growth is stoking fears of a coming recession. Diane Swonk, chief economist at major accounting firm KPMG, stated, “The weakness in the ADP report indicates companies may pull back further as the economy slows.”
The Federal Reserve has been rapidly hiking interest rates to fight inflation, sparking worries this could tip the economy into a downturn. Though the Fed is expected to slow its pace of rate increases today, the cumulative impact of substantially higher borrowing costs may already be taking a toll.
“This adds to evidence from other indicators that the economy is slowing with risks skewed to the downside due rising rates and higher inflation eating into demand,” said Rubeela Farooqi, chief U.S. economist at High Frequency Economics.
Labor Market Resilience Fading
After exhibiting remarkable resilience throughout 2022 and early 2023 in the face of elevated inflation and rising rates, cracks seem to be appearing in the labor market. Job openings plunged in December to their lowest level since April 2021, indicating lessening demand for workers.
The January employment report set to be released by the Labor Department on Friday is forecast to show a still-solid 185,000 gain in nonfarm payrolls and the unemployment rate holding at 3.5%. But today’s data hints the tide may be starting to turn.
“The labor market is cooling and companies are pulling back hiring in the face of higher interest rates, high inflation that is squeezing profit margins and weaker demand,” said Ellen Zentner, chief U.S. economist at Morgan Stanley.
Ominous Signs Amid Fragile Recovery
While the economy returned to its pre-pandemic size over a year ago, the recovery remains fragile given global headwinds. Elevated inflation and a strong dollar have softened overseas demand, weighing on exports and manufacturing.
“The ADP figures show that labor market conditions weakened across all company sizes and sectors at the start of 2023,” said Lydia Boussour, lead U.S. economist at Oxford Economics. She warned this loss of momentum points to “broadening layoff risks.”
Today’s disappointing data comes on the heels of news that GDP shrank in both Q1 and Q2 of 2022, meeting one informal benchmark for a recession. And consumer spending has stalled in recent months, falling 0.2% in December.
What Happens Next?
Employment is a lagging indicator, typically peaking after a recession has already begun, meaning conditions could deteriorate further in coming months.
Economists will be closely monitoring Friday’s nonfarm payrolls figures for January along with wage growth data for signs of additional cooling. More modest job gains coupled with slowing wage growth could relieve pressure on the Fed to continue aggressively hiking rates.
But the central bank has made clear it wants convincing proof that underlying inflation pressures are abating before pausing its tightening campaign. Several policymakers have recently affirmed a higher terminal rate above 5% may still be warranted, even as markets bet on a stopping point around 4.9% by summer.
Ongoing rate hikes even amid slower growth would increase risks of an eventual recession and higher unemployment. But cooling wage pressures could also reduce the need for future layoffs. The path forward remains highly uncertain.
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