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As a critical preview ahead of this month's nonfarm payrolls report, the United States' largest payroll processor, ADP, revealed that private sector hiring cooled significantly in July. For the Federal Reserve, which has shifted its policy focus toward inflation, fluctuations in the labor market could become a key catalyst influencing interest rate decisions.

Employment data softens

ADP data released on Wednesday showed that private businesses added just 44,000 net new jobs in July, a sharp decline from the revised figure of 95,000 in June and below market expectations of 75,000 positions. Hiring had accelerated earlier this year, with May's job gains reaching 122,000, the highest in 16 months. All net job additions came from the services sector, which added 47,000 positions, while goods-producing industries lost 3,000 jobs. Among sub-sectors, education and healthcare services added 36,000 jobs, continuing their long-standing trend of leading employment growth; financial activities added 10,000; professional and business services added 9,000; and other services added 6,000. Trade, transportation, and utilities lost 8,000 jobs, while natural resources and mining declined by 6,000. Job gains were relatively evenly distributed across businesses of different sizes, with small firms employing fewer than 50 people contributing the most, adding 23,000 positions. Annual pay growth for employees staying in their roles held steady at 4.4%, but pay gains for job switchers reached 7%, the highest since August 2025. The ups and downs in hiring data were partly influenced by factors related to the World Cup. ADP Chief Economist Nela Richardson commented, "Job switchers are highly sensitive to the real-time economic environment, and the rapid rise in their pay indicates supply constraints in some areas of the labor market. At the same time, traditional hiring patterns are changing as businesses adapt to the evolving macroeconomic landscape."

Another data release on the same day also pointed to tepid business hiring intentions. The Institute for Supply Management (ISM) Services Index edged up slightly to 54.1 in July from 54.0 in June, marking six consecutive months of expansion. However, key material shortages and persistently high inflation pushed up business operating costs, prompting companies to control hiring. The ISM noted that due to multiple economic uncertainties, businesses scaled back hiring in July. The employment sub-index fell below the 50 breakeven point, re-entering contraction territory for the fourth time in the past five months. Outside of the healthcare industry, the vast majority of service sectors added very few new jobs. Pantheon Macroeconomics Chief U.S. Economist Samuel Tombs stated, "Soaring energy prices have added extra cost pressures, while AI is boosting the productivity of existing employees, making it harder for companies to gauge medium-term staffing needs. As a result, businesses have pulled back on hiring."

Could nonfarm payrolls disrupt rate hike pricing?

ADP's report provides a forward-looking reference for the U.S. Labor Department's upcoming employment data release on Friday. The ADP report is based on anonymous payroll data from over 26 million private-sector employees nationwide. In contrast, the Labor Department's employment report covers both private and government sector jobs, using a different official survey methodology. Currently, Wall Street expects Friday's nonfarm payrolls report to show a gain of 83,000 new jobs in July, with the unemployment rate holding steady at 4.2%. However, there is a slight upside risk to the unemployment rate: The Conference Board's survey last week showed that the proportion of consumers who viewed jobs as "plentiful" in July fell to its lowest level since February 2021. For now, the labor market is in a state of stagnation but is relatively stable: hiring growth is sluggish, but layoffs remain near historic lows. Economists describe this situation as a low-hiring, low-firing economy. The prevailing market view is that the labor market is in a "slow hiring, slow firing" state, an environment that allows the Fed to keep its policy focus on inflation.

A compilation by media outlets found that internal divisions within the Fed over the future policy stance remain evident. This week, Minneapolis Fed President Neel Kashkari and Fed Governor Lisa Cook both indicated a preference for initiating gradual rate hikes as early as possible, potentially starting at the September FOMC meeting, rather than being forced into larger hikes later. Philadelphia Fed President Anna Paulson stated she would keep an "open mind" on the monetary policy path, basing decisions on incoming economic data. New York Fed President John Williams said that current monetary policy can continue to exert downward pressure on inflation, but if inflation fails to fall as expected, the Fed would need to take action. Pricing in federal funds rate futures suggests the market sees an 80% probability of a rate hike by the Fed this year. Oxford Economics Senior Economist Bob Schwartz previously told media in an interview that the Fed achieved a hawkish pause at its July meeting. "We expect employment data to gradually weaken and services inflation to cool further, which will restrain hawkish committee members and push the Fed into a prolonged period of inaction," he said. He believes economic data in the coming months will be crucial. "If the situation develops as we expect — with tariff-driven inflation effects fading, limited pass-through of AI and energy prices to broad consumer goods prices, and continued slowing in wage growth and rents — then the pressure on the market for rate hikes will likely dissipate." Some institutions are forecasting the Fed will raise rates this year. Bank of America Global Research expects rate hikes to begin in September, totaling three increases. Danske Bank believes the macroeconomic rationale for further tightening remains strong, with rate hikes likely at the December and next March meetings. In contrast, Goldman Sachs and Barclays continue to predict the Fed will hold rates steady for the remainder of the year.

WeChat Editor| Qisan