63,000 vs. Two Major Industries: The False Fire of Small Non-Farm Payrolls and the Fed's Confidence Booster

As the market feels uneasy about the outlook for the U.S. economy, the ADP employment report, known as the “Mini Non-Farm,” was released as scheduled. In February, the U.S. private sector added 63,000 jobs, a significant rebound from the revised 11,000 in January and well above market expectations of 48,000.

This report served as a reassurance, easing some of the tension. After the data was released, CME’s FedWatch tool showed the probability of the Federal Reserve holding interest rates steady in March surged to 97.3%. However, for economists who scrutinize the details, behind this seemingly positive report lies a deep concern about the U.S. labor market’s uneven performance.

1. Impressive Total: A Recovery Supported by Two Major Industries

● Looking at the 63,000 figure alone, it’s certainly eye-catching. It’s the highest since August last year, indicating that the labor market, which nearly stagnated earlier this year, appears to be regaining stability.

● However, peeling back the layers of the total reveals that the growth momentum is quite concentrated. The hiring surge in February was almost entirely driven by two industries:

1. Education and Healthcare Services: This long-standing employment “reservoir” made a strong comeback this month, adding 58,000 jobs, leading all industries without contest.

2. Construction: Despite still-high interest rates, the construction sector surprisingly contributed 19,000 jobs, making it the second-largest driver of growth.

Together, these two industries account for far more than the 63,000 total. In other words, without their support, this employment report might look quite bleak.

2. The Other Side of Growth: Who’s Holding Back?

Contrasting sharply with the hot performance of these two industries is the rest of the U.S. economy. The report shows a chill spreading across several key sectors:

● Professional and Business Services: Seen as a barometer for white-collar jobs, this sector lost 30,000 jobs in February, becoming the biggest drag.

● Manufacturing: Despite efforts by the Trump administration to bring manufacturing jobs back, the data remains grim. The sector continued to shed 5,000 jobs this month.

● Trade, Transportation, and Utilities: Reduced by 1,000 jobs.

This “feast and famine” situation reveals the core issue of the current U.S. labor market: lack of breadth. Nela Richardson, Chief Economist at ADP, pointed out a key insight: “Because hiring is concentrated in a few industries, job switching has not led to widespread wage growth.”

3. The Wage Secret: Job Hopping No Longer Means “Pay Raise”

● If employment numbers are a macro barometer, then wage changes are the most sensitive thermometer for ordinary people. The February report sent a somewhat contradictory signal in this regard.

● For those staying with their current employer, wages seem stable, increasing by 4.5%. But for “adventurers” trying to switch jobs for higher pay, the reality is harsher: wage growth for job switchers dropped to 6.3%, down 0.3 percentage points from January.

● More notably, Richardson pointed out that the wage premium from switching jobs has fallen to the lowest level since ADP began tracking this indicator. This means that in the current employment environment, the risk of boosting income by changing jobs is increasing, while the returns are shrinking. This partly explains why, despite increased hiring, employees’ motivation to switch jobs is waning—they prefer to stay put and seek stability.

4. Divergence by Company Size: Small Businesses Take the Lead

● Another interesting detail is the change in the main drivers of employment creation. Unlike recent months, February’s growth mainly came from small businesses with fewer than 50 employees, which contributed 60,000 jobs in one month. Large companies with over 500 employees added only 10,000 jobs, while medium-sized firms actually reduced employment by 7,000.

● This may reflect that in an uncertain economic environment, small businesses are more flexible and willing to hire, or that large firms are more cautious about expanding due to inflation and cost pressures.

5. The Federal Reserve’s “Pause” Becomes More Steady

● For the Fed, balancing inflation and recession, this mixed ADP report might actually be a relief.

● Although total employment exceeded expectations, the structural divergence and slowing wage growth indicate that the labor market is not overheating but gradually stabilizing. This gives the Fed a good excuse: no need to worry about employment being too cold and needing emergency rate cuts, nor about overheating and fueling inflation.

● Recent statements from Fed officials also support this view, as their confidence in employment stabilization grows. Market expectations have adjusted accordingly; according to the CME FedWatch tool, traders now believe the March meeting will definitely hold rates steady, with the first rate cut pushed back to July.

6. Looking Ahead: The Real “Test” Comes on Friday

● Of course, while the ADP data is called the “Mini Non-Farm,” it is not official. The market’s real focus has shifted to the upcoming release of the February Non-Farm Employment Report by the U.S. Bureau of Labor Statistics this Friday.

● Currently, expectations are that the report will show about 60,000 new jobs in February, with the unemployment rate remaining around 4.3%. Unlike ADP, this official report also includes government hiring.

● Will this “biased” ADP report set the tone for Friday’s non-farm data, or will it turn out to be an independent reversal? All will be revealed this Friday.