Federal Outlays Speed Past Private-Sector Spending
ADP is an untrustworthy indicator of the US government’s private-sector jobs metric …
Don’t get too excited about the ADP’s estimate of a very low addition of 37,000 jobs to private sector payrolls in May. After all, the US government’s estimate of the monthly change in private sector payrolls shows a meaningless correlation with ADP’s estimate of the monthly change in private sector payrolls.
May’s addition of 37,000 jobs was the smallest monthly change since the ADP measure of private sector payrolls sank by -53,000 jobs in March 2023. Nevertheless, for the entirety of 2023’s first half, ADP’s estimate had private sector payrolls growing by 114,000 jobs per month.
Moreover, though the U.S. government estimate had private sector payrolls growing by only 48,000 jobs in March 2023, private sector payrolls managed to add 188,000 jobs per month, on average, during 2023's first half. One month a trend does not make.
ISM and PMI dispute ADP’s finding … But Beige Book favors ADP’s downbeat jobs view …
Not all surveys of May’s labor market concurred with ADP’s estimate. On balance, both the ISM and PMI reports on US manufacturing and service-sector activity spoke of a firming of hiring activity in May.
However, the Fed’s Beige Book summary of regional economic conditions claimed employment barely changed from April to May. A disinflationary softening of the US labor market could be inferred from the May Beige Book’s reference to “lower employee turnover” and “more applicants for open positions”. Each of the 12 Federal Reserve District Banks reported (i) shorter workweeks, (ii) less overtime, (iii) “hiring pauses”, and “staff reduction plans”. Nevertheless, the Beige Book claimed, “layoffs were not pervasive”.
Prior to the ADP report, the consensus predicted the addition of 110,000 jobs to May’s private sector payrolls, which was under April’s gain of 167,000. After adding an expected increase of 15,000 jobs for government employment, the consensus foresees a drop by the monthly increase of total payrolls from April’s 177,000 jobs to 125,000 jobs for May.
The tipping point for a return of Fed rate cuts may be the addition of fewer than 100,000 jobs per month over a three-month span. And that could arrive by August.
Tariff-driven inflation likely to trim spending and hiring …
Respondents to May’s Beige Book expect costs and prices to grow more rapidly going forward. According to the Beige Book, “contacts that plan to pass along tariff-related costs expect to do so within three months”. If tariffs do accelerate consumer price inflation, the only way to get a rate cut no later than the FOMC’s September meeting will be through a pronounced softening of the US labor market.
The Fed will not cut rates unless the real economy begins to bend under the weight of tariff-driven increases in costs and prices. I ascribe to the consensus’ view that tariff-driven price and cost inflation will slow spending and hiring by enough to drive benchmark interest rates lower.
As inferred from the CME Group’s latest FedWatch Tool, fed funds futures assign an implied probability of 76% to the now 4.38% federal funds rate being no greater than 4.13% following the FOMC’s September 17 meeting. By year-end 2025, the futures market assigns implied odds of 80% to fed funds being no greater than 3.88%. If the monthly addition to payrolls averages fewer than 100,000 jobs during 2025’s second half, fed funds will end 2025 under 3.88%.
Declining quit rate says labor market’s not strong enough to sustain faster price inflation …
Theory says higher quit rates should be associated with faster wage growth. Employees are more likely to quit their current job if higher paying and more attractive jobs are available elsewhere. (The quit rate equals the number of people quitting jobs as a percent of the number of outstanding jobs.)
Yes, faster wage growth tends to coincide with a higher quit rate according to the statistically meaningful correlation of 0.69 between the quit rate's moving three-month average and the year-over-year percent change by the average hourly wage's moving three-month average. In terms of moving 12-month averages, the correlation strengthens to 0.79.
When the quit rate averaged 1.8% during 2010-2017, the average annual rates of growth were 2.2% for the average hourly wage and 1.5% for core PCE price index. When the quit rate averaged a much higher 2.7% during April 2021 through March 2023, the average annual rates of growth soared to 4.8% for both the average hourly wage and the core PCE price index. More recently, the quit rate’s 2.0% average of September 2024 through April 2025 was joined by slower average annual growth rates of 4.0% for the average wage and 2.7% for the core PCE price index.
April 2025’s quit rate of 2.0% marked the end points of a three-month average of 2.0% and a 12-month average of 2.0%.
Jobs growth has been badly skewed towards health care and social assistance …
If we make America healthy again too quickly, will jobs growth suffer? During the year ended April 2025, the number of jobs in health care and social assistance approximated 14% of all jobs outstanding. Nevertheless, from April 2024 to April 2025, the number of jobs added two healthcare and social assistance approximated 45% of the overall increase in the number of jobs.
Expressed differently, during the 12 months ended April 2025, payrolls grew by 157,000 jobs per month, on average, wherein healthcare and social assistance added 70,000 jobs per month, while the rest of the economy added 87,000 jobs per month.
January-April 2025’s 7.4% jump by federal outlays races past broad private-sector categories …
Through the first four months of calendar year 2025, federal revenues advanced by 9.2% year-over-year to $2.028 trillion, while federal outlays expanded by 7.4% annually to $2.365 trillion.
January-April 2025’s 7.4% annual growth rate for federal outlays outran many concurrent measures of private-sector spending by a wide margin. For example, January-April 2025 showed year-over-year growth rates of 5.5% for current-dollar personal consumption expenditures, an imperceptible 0.2% for private-sector construction spending, 0.9% for manufacturing shipments, 2.0% for new orders received by US-based manufacturers, and an even lower 0.4% for new orders received by US manufacturers excluding new bookings for transportation equipment.
Other indications of the US economy’s extraordinary support from government spending …
January-April 2025’s 4.1% year-over-year rise by private-sector wage and salary income lagged the comparably measured 5.5% annual advance for the wages and salaries paid to government employees.
January-April 2025’s 0.2% year-over-year uptick by private-sector construction spending differed radically from the accompanying 6.0% annual advance by public-sector construction spending.
The private-sector construction spending of 2025’s first four months included a 1% drop to $276.4 billion for residential construction spending and a 1.6% rise to $240.6 billion for non-residential construction spending. Within private residential construction spending, outlays on new single-family homes dipped by -0.6% year-over-year to $131.4 billion, outlays on multifamily construction plunged by -13.1% to $37.7 billion, and all other residential construction spending (includes refurbishments and remodeling) rose by 3.5% to $107.3 billion.
Private sector residential construction spending will remain lackluster until the 10-year Treasury yield falls to 3.5% or lower. Treasury yields may remain higher for longer, but only when compared to the 2015-2019 averages of 1.48% for the 2-year Treasury yield, 1.90% for the 5-year Treasury yield, and 2.27% for the 10-year Treasury yield. Today’s Treasury yields are unsustainably high from the perspective of what is needed to return normalcy to residential and commercial real estate.
Treasury predicts import customs revenue may approach only 1.1% of FY 2025’s total tax take …
For 2025’s fiscal year to date (FYTD), or the span covering October 2024 through April 2025, total federal revenues increased by 4.9% year-over-year, to $3.110 trillion.
The US government's FYTD 2025 revenues included $1.681 trillion of income taxes (up 7.0% year-over-year), $0.255 trillion of corporate income taxes (down -9.2%), $1.018 trillion of social insurance and retirement taxes (up 3.5%), $0.059 trillion of federal excise taxes (up 20.0%), and another $0.059 trillion of import custom duties (up 34.4%).
For October 2024 through April 2025, import custom duties comprised merely 1.9% of total federal revenues.
For all of FY 2025, or October 2024 through September 2025, the Treasury Department’s projected $0.633 trillion of import customs duties approaches an even lower 1.1% of the anticipated $5.561 trillion of federal revenues.
FYTD 2025’s $1.1 trillion of federal health and human services outlays soar higher by 10.7% annually …
FYTD 2025's $4.159 trillion of US government outlays were up by 8.9% from a year ago.
The $1.058 trillion of FYTD spending by the Department of Health and Human Services was the biggest broad category of federal spending. Health and Human Services outlays were also higher by an outsized 10.7% year-over-year.
In descending order were the $0.934 trillion of social security outlays (up 8.7% yearly), the $0.587 trillion of net interest expense (up 10.8%), and the $0.509 trillion of defense spending (up 8.2%).
The top four broad spending categories of health and human services, social security, net interest expense, and defense accounted for 75% of the federal expenditures during October 2024 through April 2025. The US Treasury projects the top four broad spending categories will absorb 73% of the federal expenditures for the entirety of FY 2025, or the 12-months-ended September 2025.