Private hiring slowed to its weakest pace since January last month. Yet the market's conviction that the Federal Reserve will raise rates in two weeks barely budged.
Private employers added just 38,000 jobs in August, according to the latest ADP report out Wednesday, well below the 47,000 consensus estimate. It was the weakest monthly gain since January.
Still, the probability of a rate hike to 3.75%–4.00% at the Federal Reserve's Sept. 16 meeting held at 66.2%, according to CME FedWatch.
That leaves investors with a simple but increasingly important question: Why did Fed Chair Kevin Warsh sound so hawkish at Jackson Hole, effectively guiding for a near-term rate hike, when the labor market is barely adding jobs?
What The ADP Report Actually Showed
The 38,000 jobs number looks weak. But the composition matters.
Education and health services added 45,000 positions. Leisure and hospitality gained 16,000, while construction added 12,000.
Those gains were offset by a 17,000 decline in manufacturing and a 16,000 drop in professional and business services.
Large employers accounted for 34,000 of the net increase. Small businesses added just 3,000, while medium-sized companies were flat.
Pay is where the report speaks to the Fed. Median base pay rose 3.2% year over year, 3.0% for workers who stayed put and 4.7% for those who changed jobs.
ADP chief economist Nela Richardson said predictable wage growth has been overtaken by demographic change, persistent inflation and the effects of AI on jobs.
That is not a broad collapse in hiring. It is an uneven labor market, with strength concentrated in sectors that continue to need workers.
Bill Adams, chief U.S. economist at Fifth Third Commercial Bank, read the internals as cyclical and white-collar losses offset by hiring in less cyclical industries, and flagged downside risk to Friday's government report.
He also said the data show AI "is affecting hiring less than other changes in the economy," noting that several industries with obvious AI applications are still adding workers while insulated ones cut.
Matthew Martin, senior U.S. economist at Oxford Economics, said the labor market is settling into a "more tepid pattern associated with the no hire, no fire labor market."
He also said slower employment gains are not necessarily a concern for unemployment given the low breakeven rate.
That distinction is crucial for understanding Warsh.
Warsh Has Already Told The Market His Standard
If the workforce itself is growing slowly, the economy does not need to create hundreds of thousands of jobs every month to remain near full employment.
A low payroll number can therefore coexist with a stable unemployment rate.
Warsh made exactly that distinction at Jackson Hole.
"Labor markets are quite stable," Warsh said. He also said the 4.1% unemployment rate remains low by historical standards.
He considers current labor-market conditions consistent with full employment.
Warsh's bigger concern is inflation.
"The Fed's predominant focus right now should be on prices," Warsh said at Jackson Hole. He noted that 12-month PCE inflation stood at 3.7%, while the six-month measure was 4.1%.
A Bank of America analysis found that Warsh devoted roughly twice as many words to inflation as to the labor market in his Jackson Hole speech.
The bank also said payrolls were unlikely to be the deciding factor for September. The consumer price index could matter more.
That makes next week's inflation data potentially more important than Friday's jobs headline.
"We must be confident that underlying inflation is moving to our objective, clearly and at sufficient speed," Warsh said. "Otherwise, we have work to do."
That leaves August CPI on Sept. 11 as the last consequential data point before the decision five days later.
The S&P 500 – tracked by the SPDR S&P 500 ETF Trust SPDR S&P 500 ETF Trust (SPY) – traded 0.5% higher on Wednesday to 7,670 points. The yield on the 10-year Treasury bond stayed flat at 4.8%.
