Fed Rate Cut of 0.5% 'Wouldn't Be A Surprise' After Private Payrolls Fall Short, Economist Says

The August payroll report from ADP Thursday is tipping odds toward a 0.5% rate cut by the Federal Reserve two weeks from now, according to economists.

The report said 99,000 jobs were added in August — down from 140,000 expected — and reflects the fifth straight month of slowing private payroll growth. The data could foreshadow a softer-than-expected official payroll report on Friday and a significant rate cut by the Federal Reserve later this month, said Jeffrey Roach, chief economist for LPL Financial.

“If the payroll report surprises investors and comes in weaker than expected, the likelihood of a 50 basis point cut increases at the upcoming Fed meeting,” he said on Thursday.

Private Payroll Takeaways: Companies in the service sector brought on 72,000 more jobs in August and goods producers added 27,000, according to the ADP report.

The construction and education/health services industries saw the biggest employment hikes in August, adding 27,000 and 29,000 more jobs, respectively.

Professional/business services shedded 16,000 jobs, while manufacturing lost 8,000 and information dropped 4,000.

Year-over-year pay increases came in at 4.8% in August, the same as July, and raises for job-switchers went up slightly from 7.2% in July to 7.3% in August.

Read Also: Private Employment Grows By 99,000 In August, Sharply Misses Forecasts Of 140,000: ‘The Labor Market Overall Is Softening’

Unemployment benefits for the week ended Aug. 31 slipped from 232,000 for the prior week to 227,000 for last week, beating an expectation of 230,000 claims for unemployment benefits.

Roach said smaller companies are feeling greater pressure than larger companies to lower labor costs, and workers who switch jobs keep receiving higher pay raises than those who stay at their jobs.

‘A Half-Percent Cut Wouldn’t Be A Surprise’: Thursday’s ADP report and the Fed’s August Beige Book report released on Wednesday make a stronger case for the Fed to cut the key interest rate by 0.5%, said Bill Adams, chief economist for Comerica Bank.

“The odds of a half percentage point rate cut at the Fed's next meeting are a little larger than they seemed yesterday,” he said.

“We still see a quarter-percent cut as more likely but a half-percent cut wouldn't be a surprise.”

The ADP and Beige Book reports showed the economy slowed over the summer due to the business cycle, not just because of the impact of Hurricane Beryl.

The financial markets are pricing in 50-50 odds that the Fed cuts interest rates by 0.5% Sept. 18 versus 0.25%, Adams said.

“On the one hand, the Fed wants to prevent the slowdown of job growth from becoming a self-reinforcing decline,” he said.

“On the other hand, the Fed doesn't want inflationary pressures to revive as rate cuts help credit-sensitive parts of the economy rebound.”

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Illustration created using artificial intelligence via MidJourney.