FILE PHOTO: A “Help Wanted” sign hangs in restaurant window in Medford, Massachusetts, U.S., January 25, 2023. REUTERS/Brian Snyder/File Photo

By Lucia Mutikani

WASHINGTON, Dec 3 (Reuters) - U.S. private payrolls posted their biggest drop in more than two and a half years in November as small businesses shed jobs, but the weakness is probably not a true reflection of the labor market's health, with recent government data showing still-low layoffs.

Economists also cautioned against reading too much into the unexpected decline shown in the ADP employment report on Wednesday, arguing the monthly estimate has diverged from the government's private payrolls count produced by the Labor Department's Bureau of Labor Statistics.

Some economists said combining employment measures from the National Federation of Independent Business, the Conference Board and regional Federal Reserve surveys showed labor market softness, but not the deterioration suggested by the ADP data.

"It is too loosely correlated with the official data to be troubling," said Samuel Tombs, chief U.S. economist at Pantheon Macroeconomics. "Our model points to a first estimate of a 75,000 to 100,000 increase in private payrolls in November, which after revisions and benchmarking we think would be consistent with growth of about 25,000."

Private employment decreased by 32,000 jobs last month, the most since March 2023, after an upwardly revised increase of 47,000 in October, the ADP report showed. Economists polled by Reuters had forecast private employment would rise by 10,000 jobs after a previously reported rebound of 42,000 in October.

Small establishments lost 120,000 jobs last month, which economists attributed to tariffs on imports that have raised costs for businesses. Payrolls at medium enterprises increased 51,000 while those at large businesses rose 39,000.

The ADP report is jointly developed with the Stanford Digital Economy Lab. The BLS will release its closely watched employment report for November on December 16.

The report, originally due on December 5, was delayed by the recently ended U.S. government shutdown. It will include nonfarm payrolls for October. The unemployment rate for October will never be known because the longest shutdown in history prevented the collection of data for the household survey from which the jobless rate is calculated.

The economy likely shed jobs in October after thousands of federal workers who accepted buyouts dropped off the government payroll in September. A modest rebound was expected in November. The economy added 119,000 jobs in September, with the unemployment rate rising to a four-year high of 4.4%.

First-time applications for state unemployment benefits have been consistent with the "no-hire, no-fire" narrative, at least through the second-last week of November. Economists say economic uncertainty stemming from tariffs has left the labor market in a state of paralysis.

While a separate survey from the Institute for Supply Management showed its measure of services sector employment contracted in November, the pace of decline slowed for the fourth straight month.

It said comments from respondents included "filling vacancies" and "still not getting a lot of applications for positions, as we require work from our offices now."

SERVICES SECTOR IS HOLDING UP

The ISM's nonmanufacturing PMI was little changed at 52.6 last month, from 52.4 in October. Businesses continued to mention tariffs and the related customs paperwork as constraints to activity. Air traffic disruptions tied to the government shutdown also slowed deliveries of supplies.

U.S. central bank officials meeting next week to decide on interest rates will not have November's employment report in hand, and some economists said they could pay more attention to the ADP report than usual, despite its flaws.

As many as five of the 12 voting policymakers on the central bank's rate-setting Federal Open Market Committee have voiced opposition to or skepticism about cutting rates further, while a core of three members of the Washington-based Board of Governors wants rates to fall.

"The ADP report might be all that it needs for the more dovish-leaning governors to counter some hawkish-leaning regional presidents to push through another rate cut," said Sal Guatieri, a senior economist at BMO Capital Markets.

Stocks on Wall Street were trading higher. U.S. Treasury yields fell and the dollar slipped against a basket of currencies.

Though the pass-through from import duties has been moderate, inflation could remain above the Fed's 2% target for some time. A separate report from the BLS showed import prices were flat in September, but the cost of consumer goods excluding motor vehicles increased 0.4% for a second straight month.

The flat reading in import prices, which exclude tariffs, followed a 0.1% gain in August. In the 12 months through September, import prices increased 0.3%, the first year-on-year rise since March, and followed a 0.1% dip in August.

The report was delayed by the government shutdown.

Prices of goods imported from China jumped 0.8%, the biggest gain since July 2008. The cost of Japanese imports increased 0.7%. Prices of imports from the European Union rose 0.4%. But prices for Canadian imports fell 0.8% while the cost of goods from Mexico eased 0.1%.

"Any hope from Washington officials that America's partners would try to cut back their prices to make the tariff costs more palatable for U.S. companies and consumers is not being seen in the data," said Christopher Rupkey, chief economist at FWDBONDS. "Tariffs will be added to the costs that Americans pay for the incoming goods once the ships dock at U.S. ports."

Tariffs continued to restrain production at factories in September, with a report from the Fed showing output unchanged. Manufacturing output slowed to a 1.3% annualized growth rate in the third quarter from the April-June quarter's 2.4% pace. A surge in spending on artificial intelligence is supporting some industries, though the overall trend in manufacturing remains weak.

"As manufacturing activity is increasingly concentrated in sectors like computers and aircraft, we continue to think restrictive rates and tariffs will weigh on aggregate manufacturing activity and business investment," said Veronica Clark, an economist at Citigroup.

(Reporting by Lucia Mutikani; Editing by Chizu Nomiyama, Andrea Ricci and Paul Simao)