Leisure And Hospitality Hiring Plummets. Or, Wait — ‘Softens’

US private sector employers added far fewer jobs than expected in July.

Private sector employment rose 330,000 last month, ADP said Wednesday. It was a remarkable downside miss. Economists expected 690,000 (figure below). The lowest estimate from nearly three-dozen forecasters was half a million.

June’s headline was revised lower by 12,000.

Although ADP hasn’t been a good predictor of the government report in the pandemic era, Wednesday’s numbers were incremental evidence that the US labor market is losing momentum, that “frictions” persist or, more to the point, both.

It goes without saying that the services sector comprised almost all of July’s additions, which were evenly distributed by employer size.

Leisure and hospitality, which added 332,000 jobs in the June vintage of ADP’s monthly report, added just 139,000 in July. That was the least since February (figure below).

To put it bluntly: That’s not going to cut it. The three-month pace is still very robust (pink shaded area in the figure, above), but hiring in that sector simply can’t decelerate. If it does, rosy economic narratives won’t hold up.

This is pretty simple, really. The US needs employment in leisure and hospitality to regain pre-pandemic levels if the economy is expected to truly “normalize.” And we’re nowhere close (figure below).

The paradox is that “normal” might not necessarily be a good thing to the extent the pandemic exposed the harsh reality of American-style, “vibrant” capitalism: It relegates a huge portion of society to the edge of poverty.

Now, with the government’s finger on the scale in favor of labor, large numbers of services sector workers are apparently rethinking their bargain with employers. The arrangement had become increasingly medieval and, as I’ve variously suggested in 2021, it could be that many former services sector employees have finally woken up to the reality that there’s no more dignity in being poor and employed than there is in being destitute and unemployed. In fact, you could pretty easily argue that the former conjuncture just makes you an exploitable simpleton.

If you’re offended by the extension of eviction moratoriums, then perhaps you should favor services sector employers raising wages to levels that allow workers to pay the rent which, as one colorful personality famously put it, “is too damn high!” Everyone wants their Starbucks. Everyone wants to drop two quarters and that annoying nickel in the cup holder into the “tip” box at the drive through, in an act of condescending charity. And everyone wants to sip their $8 latte content in the notion that the social hierarchy is “as it should be.” Well, maybe it’s time the barista makes at least 75% of what you make (plus benefits) so that she can keep the lights on and afford a clean apartment. If not, then maybe you have to wake up 30 minutes earlier and make your own latte tomorrow morning. (I do. And you know what? I’m glad I learned.)

In any case, it’s never a good idea to make too much of ADP, coming as it does just 48 hours ahead of NFP. But Wednesday’s miss will garner at least a few headlines, even if they’re relegated to the back pages.

Nela Richardson, chief economist at ADP, described “uneven progress” in the US labor market. “July payroll data reports a marked slowdown from the second quarter pace in jobs growth,” Richardson remarked, adding that gains in leisure and hospitality “have softened.”

This comes at a critical juncture. The Fed is leaning heavily on labor market progress when it comes to the timing of an announcement around tapering monthly asset purchases. Although some officials have been keen to emphasize that the threshold for tightening (“substantial further progress”) was met months ago, Jerome Powell and the leadership remain mostly unconvinced. Large downside “surprises” in the labor market data will only underscore the “patient” narrative.

A familiar list of culprits took the blame for the underwhelming ADP print. “Bottlenecks in hiring continue to hold back stronger gains, particularly in light of new COVID-19 concerns tied to viral variants,” Richardson went on to note, on the way to striking an upbeat tone. “These barriers should ebb in coming months, with stronger monthly gains ahead as a result.”

Fingers crossed. Unless of course you’re depending on the “bad news is good news” dynamic to support your bull case for US equities trading at dot-com multiples. (There’s your obligatory, clichéd punchline.)