Private sector payrolls experienced their steepest decline in two and a half years this September, signaling a deeper slowdown in the U.S. labor market and adding uncertainty amid the ongoing government shutdown.

According to data released Wednesday by payroll processing firm ADP, U.S. companies cut an estimated 32,000 jobs in September after seasonal adjustments — the largest monthly drop since March 2023. This came as a surprise to economists surveyed by Dow Jones, who had anticipated a gain of roughly 45,000 jobs.

Adding to the negative tone, ADP revised its August data from an initial gain of 54,000 to a small loss of 3,000, further emphasizing a weakening trend in hiring.

The release coincides with the federal government shutdown, which has already halted key economic data releases, including the Bureau of Labor Statistics’ (BLS) official nonfarm payrolls report and the weekly jobless claims update. If the budget standoff continues, this would mark the first delay in the BLS payrolls report since 2013.

With no official labor report available, ADP’s private payroll data is drawing greater attention from both investors and policymakers. The Federal Reserve, which relies heavily on labor market figures to guide interest rate decisions, is set to meet on October 28–29. Market expectations are building for another quarter-point rate cut as the Fed seeks to balance growth concerns with inflation control.

The September job losses were broad-based, though education and health services added 33,000 positions as the school year resumed and healthcare hiring continued its steady upward trend. In contrast, the leisure and hospitality sector — a key driver of consumer spending — lost 19,000 jobs as the summer vacation season ended. Other sectors also saw declines: other services dropped 16,000, professional and business services lost 13,000, trade and transportation fell by 7,000, and construction decreased by 5,000.

Overall, service-providing industries shed 28,000 jobs, while goods-producing sectors lost around 3,000. Smaller businesses were particularly hard hit, with firms employing fewer than 50 people cutting 40,000 positions. In contrast, large employers with over 500 workers added 33,000 jobs, highlighting a growing divergence between small and large companies.

“Even with the strong GDP growth seen in the second quarter, our latest data confirm that U.S. employers remain cautious about expanding their workforce,” said ADP Chief Economist Nela Richardson.

Economic output grew 3.8% in the second quarter and is on track for about 3.9% growth in the third, according to the Atlanta Fed’s GDPNow tracker. Despite this solid momentum, concerns are mounting about the underlying health of the labor market, where the unemployment rate remains relatively low at 4.3% but signs of cooling are evident.

Boston Federal Reserve President Susan Collins cautioned that while she does not expect a dramatic softening in the labor market, risks remain. “There is an increasing chance that labor demand could fall short of supply, leading to a more significant and unwelcome rise in unemployment,” she said.

Before the shutdown, economists had projected that the BLS would report a 51,000-job gain for September, including public sector employment. However, with ADP showing a decline, expectations for the overall labor report have dimmed.

Despite slower hiring, wages continued to climb. ADP reported that average pay in September rose 4.5% from a year earlier, nearly unchanged from August. However, for workers who switched jobs, wage growth eased to 6.6%, down half a percentage point from the previous month.

ADP also noted that recent benchmark revisions by the BLS led to recalibrations in earlier data, contributing to the sharper decline reported for September. Richardson summarized the outlook succinctly: “The story hasn’t changed — hiring momentum is clearly losing steam.”