The U.S. job market experienced an impressive surge in September, marking its most substantial increase in eight months. This robust job growth not only signifies the ongoing strength of the labor market but also raises the possibility of the Federal Reserve considering further interest rate hikes. However, it’s essential to note that wage growth seems to be tapering off.
The unexpectedly strong expansion in nonfarm payrolls last month, accompanied by significant upward revisions to job figures for July and August, as reported by the U.S. Labor Department, has solidified the belief that the economy picked up speed in the third quarter.
Despite the Federal Reserve’s concerted efforts over the past 18 months to cool down demand by raising interest rates, the labor market and the broader economy have continued to show resilience. This suggests that monetary policy may remain relatively tight for an extended period. Recent reports have also indicated that job openings surged in August, and the number of first-time applications for state unemployment benefits remained consistently low throughout September.
The sharp increase in bond yields, a stronger U.S. dollar, and heightened volatility in equity markets have created a renewed sense of financial stringency. This could potentially reduce the pressure on the Federal Reserve to increase interest rates once more. Kathy Bostjancic, Chief Economist at Nationwide, pointed out, “With bond yields soaring, the dollar strengthening, and equity market volatility increasing, there is a renewed tightening of financial conditions that does some of the work for the Fed, so it’s not a done deal that the Fed will hike rates again.”
Nonfarm payrolls, which expanded by 336,000 jobs in September, marked the most significant rise since January. Moreover, the Labor Department’s revelation that the economy generated 119,000 more jobs than previously reported for July and August was a pleasant surprise. This surge in job creation far exceeded the expectations of economists surveyed by Reuters, who had predicted a gain of 170,000 new jobs. It’s important to note that the economy needs to create approximately 100,000 jobs each month to keep up with the growth in the working-age population.
While some economists speculated that the increase in payrolls might be influenced by the return of education workers following the summer break, most dismissed this notion. This was primarily because private payrolls also saw significant growth, with 263,000 new jobs added. Chris Low, Chief Economist at FHN Financial in New York, commented, “The surge in teachers hired in September cannot belie the strength in payrolls now stretching back to July, thanks to the biggest upward revisions to payrolls in a long time.”
The surge in employment was widespread across various sectors. The leisure and hospitality industry led the way with an impressive addition of 96,000 jobs. Within this sector, restaurants and bars were the primary contributors, creating 61,000 positions, thus bringing employment in this area back to pre-pandemic levels. Government employment also saw a notable uptick, with 73,000 jobs added. This was driven predominantly by state government education and local government positions (excluding education).
In addition to these gains, the healthcare sector experienced an increase of 41,000 jobs, thanks to growth in ambulatory healthcare services, hospitals, nursing, and residential care facilities. Employment in professional, scientific, and technical services also saw an uptick, though there was a continued decline in temporary help hiring. Furthermore, employment in the transportation and warehousing industry, retail, and construction all saw increases, largely attributed to the strength of the housing market despite historically high mortgage rates.
The strike by the United Auto Workers (UAW) at General Motors, Ford Motor, and Chrysler parent Stellantis, which began at the end of the week when the government conducted its business survey for the employment report, had no discernible impact on payrolls. Manufacturing payrolls increased by 17,000 jobs, signifying robust growth in this sector.
However, the motion picture and sound recording industries experienced a decrease of 7,000 jobs, partly due to a recently concluded months-long strike by Hollywood writers.
In response to these developments, stocks on Wall Street were trading higher, while the U.S. dollar weakened against a basket of currencies. U.S. Treasury prices fell, resulting in yields on the benchmark 10-year note and 30-year bond reaching levels not seen since 2007.
The moderation in wage growth may provide some comfort to policymakers eager to see labor market conditions stabilize. Average hourly earnings increased by 0.2%, following a similar gain in August. This lowered the annual wage growth rate to 4.2%, the smallest gain since June 2021, down from 4.3% in August. Most of the jobs added in September were in lower-paying industries.
However, wages are still rising faster than the 3.5% pace considered consistent with the Federal Reserve’s 2% inflation target. As fewer people leave their jobs in search of better opportunities, wage growth could continue to moderate, although substantial union contracts may pose a risk.
Financial markets currently lean towards the Federal Reserve maintaining its current interest rates at the upcoming Oct. 31-Nov. 1 policy meeting. Nevertheless, the odds of a rate hike are increasing, according to CME Group’s FedWatch tool. More clarity on the Fed’s next move could emerge from upcoming inflation data. Since March 2022, the Fed has raised its benchmark overnight interest rate by 525 basis points to the current range of 5.25%-5.50%.
While the unemployment rate remained steady at an 18-month high of 3.8% in September, household employment showed modest growth, with more people entering the labor market. Fewer individuals were working part-time for economic reasons, resulting in a drop of 156,000 in their numbers.
Consequently, a broader measure of unemployment, which includes individuals who want to work but have given up searching and those working part-time because they cannot find full-time employment, declined from 7.1% in August to 7.0%. Fewer people were also experiencing longer spells of unemployment.
The robust labor market is bolstering the economy, with growth estimates for the third quarter reaching as high as a 4.9% annualized pace—more than double the non-inflationary rate of around 1.8% that Federal Reserve officials have indicated.
Sarah House, Senior Economist at Wells Fargo in Charlotte, North Carolina, summed up the situation, saying, “While the typical worker may be experiencing a slower pace of wage growth, the still-solid rate of hiring suggests growth in aggregate income derived from the labor market continues on at a decent clip, which should support overall consumer spending.”
The U.S. job market’s resilience continues to be a critical factor in the nation’s economic recovery, leaving many observers cautiously optimistic about the future.
