July private payrolls rose by 330,000, far short of estimates: ADP

U.S. employers added back fewer jobs than expected in July, with the tepid return of workers capping overall economic growth as the economy struggles to fully emerge from the grips of the COVID-19 pandemic.

Private payrolls increased by 330,000 in July, ADP said in its closely watched monthly report on Wednesday. Consensus economists were looking for a rise of 690,000, according to Bloomberg data. In June, the economy added back 680,000 private payrolls, with this figure revised down from the 692,000 previously reported.

Private sector employment has increased for seven consecutive months, with the pace of growth picking up steam as vaccinations took place in the U.S. and consumers began spending more time outside of their homes. Many of the gains have come in the hard-hit services sector, tracking the reopening of restaurants, bars and other in-person and travel-related activities.

In July, the leisure and hospitality sector added back 139,000 payrolls on net, comprising well over a third of the monthly overall private payrolls gain. However, this was also a marked deceleration from June, when more than 300,000 leisure and hospitality jobs returned. Other service sector areas that saw notable increases in July included education and health services with 64,000 payrolls and professional and business services with 54,000 jobs.

The goods-producing sector also posted payroll gains for the month, albeit at a decelerating pace compared to June. Construction payrolls rose by just 1,000 on net in July after rising by nearly 50,000 in June. Manufacturing and mining jobs also rose on net last month.

But in recent months, companies across industries have faced labor scarcities, with consumers' pent-up demand after a year of staying in place far outpacing the recovery in the labor market. In the Federal Reserve's latest monthly Beige Book, the central bank cited "more widespread" labor and material shortages in July compared to the prior month.

"The appetite is there — I think the meal is missing," ADP Chief Economist Nela Richardson told Yahoo Finance Live on Wednesday. "Right now, skilled workers have been in short supply ... This isn't new. It's just been amplified by the pandemic."

And in a note published Monday, Bank of America strategists highlighted that inflation mentions were up 1,100% over last year on companies' second-quarter earnings calls, with labor-related mentions some of the most commonly cited remarks. Companies from Caterpillar (CAT) to Restaurant Brands (QSR) have been among those citing increased compensation costs as wages rise to compete for workers.

Still, some policymakers and economists are awaiting a bigger pick-up in job growth in the coming months as many of the factors still keeping workers on the sidelines recede.

"Myriad factors are tempering labor supply at the moment — the need to care for children, fears of COVID, generous unemployment benefits," said Mary Daly, San Francisco Federal Reserve President, in a blog post on Tuesday. "But there is no reason to expect those to be permanent or even highly persistent features of the labor market."

A fuller picture of the latest progress toward the labor market's recovery will come on Friday from the Labor Department's July jobs report. In this, non-farm payrolls are expected to grow by 875,000, including 718,000 private payroll gains. The unemployment rate is also expected to dip to a new pandemic-era low of 5.7%, from June's 5.9%.

The ADP report "will anchor market expectations going into Friday's BLS print," Brett Ryan, Deutsche Bank senior U.S. economist, said in a note. "Though the ADP series has had some large misses — year-to-date the average absolute miss (as-reported data) relative to private payrolls has been a little over 300k — it was within 30k of last month's private payroll print. Hence, market participants may put a bit more weight on this week's ADP data."

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Emily McCormick is a reporter for Yahoo Finance. Follow her on Twitter: @emily_mcck

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