The small non-farm payrolls surprised to the downside, while the large non-farm payrolls were hot. Which one should the market believe?

When the "small non-farm" and "large non-farm" show completely opposite trends, investors face a tricky question: who should they believe?

Recent data released in the past few days shows a rare divergence in U.S. employment data for June, with official and private sector data presenting starkly different pictures. According to the U.S. Bureau of Labor Statistics, non-farm payrolls increased by 147,000 in June, exceeding the market expectation of 106,000, and the unemployment rate fell from 4.2% in May to 4.1%.

However, the ADP employment report indicates that private sector jobs decreased by 33,000, marking the first negative growth since March 2023, with an expected value of 98,000. This is not only a difference in magnitude but also a divergence in direction.

Citigroup commented that this divergence is not a statistical anomaly but may reveal the underlying fragmentation in the U.S. labor market.

According to the latest analysis from CNBC, this fragmentation mainly stems from a surge in government hiring. In June, government jobs increased by 73,000, accounting for nearly half of the total non-farm employment growth for the month. The ADP report only counts private sector employment and does not include government positions.

Data released by the U.S. Bureau of Labor Statistics shows that in June's non-farm employment, government jobs saw significant growth; private sector job growth was weak, marking the lowest increase since last October:

• U.S. government jobs increased by 73,000: with state and local education departments contributing 64,000 job growth
• The private sector added only 74,000 jobs: the goods-producing sector added just 6,000 jobs, with construction increasing by 15,000 and manufacturing losing 7,000 jobs. The service sector added 68,000 jobs, mainly concentrated in healthcare and social assistance, which contributed 59,000 new jobs.

Citigroup analyst Andrew Hollenhorst pointed out in the report that the unusual growth in government jobs may stem from seasonal adjustment issues, particularly in handling the end-of-school-year dates. This seasonal distortion may reverse next month, when government hiring could drag down overall employment growth. The analyst stated:

After excluding the disturbances caused by government hiring, private sector job growth is not only weak but also highly concentrated in the healthcare sector.

The Real Reason for the Decline in Unemployment Rate

Citigroup analysts noted in the latest report that although the unemployment rate unexpectedly fell, this is mainly due to a decline in the labor force participation rate for the second consecutive month, rather than a genuine improvement in the labor market. In June, the labor force participation rate fell from 62.4% in May to 62.3%, slightly below market expectations, reflecting a decrease in labor supply due to factors such as immigration The report shows that in the past two months, household surveys indicated a decrease of 603,000 jobs, which normally would suggest an increase in the unemployment rate. However, the labor force shrank by 755,000, leading to a decrease in the unemployment rate instead.

Citigroup analysts believe that the U.S. job market is slowing down, with both household and establishment surveys showing signs of weak hiring. They expect the unemployment rate may rise in the coming months. The significant increase in the number of "discouraged workers" also indicates that the participation rate may decline further, which typically occurs during periods of a weak labor market.

Which data should the market trust?

Faced with diverging data, investors need to consider multiple factors comprehensively. According to CNBC, Indeed Hiring Lab economist Cory Stahle stated: “While overall job growth and a declining unemployment rate are undoubtedly good news, these gains may seem hollow for job seekers outside of healthcare, local government, and public education.”

Citigroup analysts believe that the employment data for May and June exaggerated the strength of the labor market. Given that both business and individual surveys show a slowdown in hiring, along with cooling wage growth, the labor market is slowly loosening.

From a policy perspective, the unexpected decline in the unemployment rate may lead Federal Reserve officials to adopt a wait-and-see approach at this month's meeting. However, Citigroup maintains its expectation of a 25 basis point rate cut starting in September, with a total of 125 basis points in cuts expected before March next year.

Analysts warn that if the rise in unemployment, which should be spread over several months, concentrates in the upcoming employment reports, it could pose a dovish risk to Federal Reserve policy. Therefore, investors need to look beyond the surface numbers to understand the deeper structural changes when interpreting employment data