Recent data from the ADP National Employment Report, often referred to as the "small ADP," indicates that U.S. businesses added jobs at the fastest pace in over a year during April. This provides substantial new evidence of stabilization in the American labor market. Figures released on Wednesday by ADP Research Institute showed private sector employment increased by 109,000 in April, marking the strongest performance since the beginning of 2025, following a revised gain of 61,000 the previous month. Although the April ADP figure significantly exceeded 100,000, it fell short of the median economist forecast of 120,000 but surpassed the average expectation of 99,000.
The rebound in ADP employment, largely driven by substantial investments in artificial intelligence, has significantly bolstered economists' optimistic expectations for a perfect "soft landing" for the U.S. economy. However, it has simultaneously further weakened the dovish logic supporting Federal Reserve interest rate cuts within the year. Amid a combination of employment data showing no significant deterioration, consumer spending holding firm, and resurgent inflation fueled by energy costs and tariffs, the Fed is more likely to maintain a cautious, wait-and-see stance of "higher for longer" interest rates.
Detailed statistics reveal that over half of the hiring growth came from the healthcare services and education sectors. Employment also rose in the trade, transportation, and utilities sectors. Job gains in construction likely reflect the booming construction of hyperscale data centers for AI training and inference, a core area of massive AI investment. This trend is vividly illustrated by the significant stock price surges and repeated record highs recently achieved by leaders in the AI computing supply chain, including providers of AI GPUs/ASICs, data center CPUs, HBM/NAND/HDD storage, advanced 2.5D/3D packaging, and liquid cooling technologies.
As depicted in the accompanying chart, U.S. businesses continue to increase hiring, adding 109,000 jobs in April—the most in over a year—propelled by the AI investment boom. These latest employment figures suggest the labor market is finding its footing after a particularly challenging year for hiring, supported by trillions of dollars in AI computing infrastructure spending focused on data centers. Furthermore, as the paths for tariff policies, immigration policies, and other fiscal stimulus measures become clearer, some major employers may now be more willing to increase headcount, while layoffs across the U.S. economy remain low.
Concurrently, market expectations for optimistic outcomes in U.S.-Iran peace talks, combined with the influence of AI computing power and robust corporate earnings outweighing oil price and geopolitical risks, are fueling Wall Street's anticipation that the strong stock market gains—resulting in the strongest monthly performance in years—may extend into May. Impressive quarterly results released on the same night by the three cloud computing giants—Microsoft, Google, and Amazon—highlighted the unexpectedly rapid expansion of their AI-driven cloud businesses, leading Wall Street to reassess the commercial returns on AI investments. These tech giants aim to convince more investors that their massive investments in artificial intelligence are on the verge of generating record-breaking returns.
A recent research report from Morgan Stanley analysts indicates that, following the announcement of even stronger AI capital expenditure plans by these North American giants, the firm now expects the combined capital expenditure of the five hyperscale tech companies (Amazon, Google, Meta, Microsoft, Oracle) to reach approximately $800 billion in 2026, potentially surpassing $1.1 trillion in 2027, an upward revision from a previous forecast of $950 billion. The analysts at Morgan Stanley emphasized that the core logic behind these enormous investments is to prioritize heavy investment and capacity building first, followed by recouping costs through scaled commercial revenue and Return on Invested Capital (ROIC) from AI computing resources. The massive surge in cloud computing backlogs serves as direct evidence that this strategy is viable, with the faster-than-expected growth in the cloud businesses of these giants prompting a re-evaluation of AI's commercial payoffs on Wall Street.
Alex Pelle, a senior economist at Mizuho Securities USA, noted in a report that the data shows "following a solid performance in March, the labor market continued its positive growth momentum in April." The ADP report revealed that job growth in April was driven by small businesses with fewer than 20 employees and large enterprises with 500 or more employees. Hiring was generally robust across the Western and Southern United States. Nela Richardson, Chief Economist at ADP and a prominent Bloomberg contributor, stated, "Both small and large employers are hiring, but we are seeing some softness among medium-sized manufacturing firms."
The ADP report, produced in collaboration with the Stanford Digital Economy Lab, also indicated that median annual pay growth for job-changers was 6.6% year-over-year. For those who remained in their roles, wage growth was 4.4%, slightly lower than the previous month. The U.S. government's official employment report, due on Friday, is expected to show a more moderate pace of hiring in April, following the largest job gain since 2024 recorded in the prior month.
Looking ahead, a key question is whether the geopolitical conflict in the Middle East, which has already driven inflation higher and pushed consumer confidence to record lows, will eventually impact the labor market. Following the Fed's decision to hold rates steady last week, Chair Jerome Powell noted that the job market has shown "increasing signs of stabilization," which is one reason policymakers are in no rush to reduce the benchmark borrowing cost. The ADP employment statistics are based on payroll data covering over 26 million private-sector employees in the U.S.
The strengthening ADP employment figures have further dampened the prospects for near-term Fed rate cuts while reinforcing expectations for an economic soft landing. Even before the ADP data release, traders in the interest rate futures market had significantly adjusted their monetary policy expectations. Following the report, expectations for rate cuts were pared back further, with traders now pricing in the first 25-basis-point Fed rate cut only by mid-2027. Some traders have even begun to price in the possibility of the Fed returning to a rate-hiking path during this interval. Prior to the outbreak of the Iran conflict, the market had priced in two full rate cuts for this year. The Fed has held rates steady since the December FOMC meeting, when it lowered the policy rate range to 3.5%-3.75%.
Molly Brooks, a senior U.S. rates portfolio strategist at TD Securities, commented, "In the absence of any deterioration in growth, the Fed needs to see price stability first, followed by several consecutive reports showing that inflationary pressures are transitory and moderating, before feeling comfortable with the prospect of further rate cuts. The Fed's dual mandate has now become more focused on the inflation path, especially as recent labor market data has shown surprisingly strong resilience."
The addition of 109,000 private sector jobs in April, up from a revised 61,000 in March, indicates that businesses have not significantly frozen hiring despite high oil prices, tariffs, and geopolitical conflicts. Simultaneously, the U.S. real GDP grew at an annualized rate of 2.0% in the first quarter. Although this was below expectations, it represents a significant rebound from the 0.5% growth in the fourth quarter of 2025, supported by AI-related capital expenditures, recovering government spending, and core private demand. In other words, the U.S. economy is not exhibiting the sharp employment declines typical before a recession. Instead, it displays the classic soft-landing characteristics of "slower growth with underlying resilience," bringing the Fed officials' desired soft-landing trajectory seemingly within reach.
Consequently, the latest ADP employment rebound has strengthened market expectations for a U.S. soft landing but has also further reduced the justification for imminent Fed rate cuts. With employment not significantly weakening, consumer spending holding up, and inflation resurging due to energy and tariffs, the Fed is more likely to maintain its "higher for longer"观望 stance. A decisive resurgence in rate-cut trading would likely require consecutive signs of weakness in subsequent non-farm payrolls, unemployment rates, real consumption, and corporate layoff data.
Some economists note that with the labor market remaining resilient and inflation risks persistent, the window for Fed rate cuts is narrowing. Michael Feroli, Chief U.S. Economist at J.P. Morgan, pointed out that with strong U.S. economic growth and core CPI likely to remain persistently above 3%, he expects the Fed to hold rates steady throughout 2026, and even predicts a potential rate hike in the third quarter of 2027. On May 4th, Barclays officially revised its previous dovish policy forecast, shifting from expecting a rate cut in September to predicting no rate cuts for the entire year. The primary reason cited is that high oil prices resulting from the Iran war will permeate various sectors, keeping the inflation rate elevated for an extended period. As the war strains supply chains, other major Wall Street firms, including Wells Fargo and Deutsche Bank, have also retracted their dovish monetary policy expectations for rate cuts in 2026.
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