Job numbers came in hot in September. U.S. employers added 336,000 jobs last month, far surpassing expectations heading into the monthly jobs report. The Labor Department also revised up estimates from July and August by a net 119,000 jobs. The unexpected strength in the labor market will increase pressure on the Federal Reserve to keep interest rates higher for longer.
Stunning Jobs Report Reflects Unexpected Strength in Labor Market
U.S. Hiring Surged to 336,000 in September
Top Takeaways from the Report
Job Growth Surged in September
In another sign of unexpected strength, the Labor Department reported that employers added 336,000 jobs in September. It also revised up previous estimates of employment growth for July and August by a net 119,000 jobs. The September job gains were much higher than analysts had expected and reflects a red hot labor market. The economy has added an average of 266,000 jobs per month for the last three months, up from an average of 201,000 jobs per month during the April to June period.
The continued strength in the labor market will complicate efforts by the Federal Reserve to slow growth and return the economy back to normal. The Fed recently emphasized that it will need to keep interest rates higher for longer than previously expected. This will continue to pressure bond and equity markets.
The unemployment rate in the United States remained at 3.8% in September, after a notable increase in August. The defining characteristic of the economy is continued labor shortages, as demand for labor far exceeds the supply of available labor. This has strengthened employee bargaining power. Labor strikes have increased over the past year, impacting industries such as entertainment, auto production, and healthcare.
The labor force participation rate remained unchanged at 62.8% in September. The labor participation rate shows the percent of the working-age population that is either employed or looking for a job. Labor participation is still below the pre-pandemic rate of 63.3% recorded in February 2020. Even with strong employer demand for labor, many people continue to sit on the sidelines and out of the labor force.
On the “soft landing” side of the economic argument, wage growth slowed slightly in September. The one-year growth in average hourly earnings dropped to 4.2% in September, compared to 4.3% in August. Monthly earnings growth remained steady at 0.2% in September. This is a good sign that workers in September are demanding slightly less pay increases than in August. However, the current annual wage growth is still much higher than the long-term average and continues to pressure employers who must balance higher labor costs with tightening financial conditions.
Inflation continued to pressure prices in August. The one year growth in consumer prices was 3.7% in August, compared to 3.2% in July. On a monthly basis, inflation jumped 0.6% in August, compared to 0.2% the previous month. After many months of slowing price increases, inflation may be entering its “sticky” stage. While it has been relatively easy for inflation to drop from the 9% level seen last summer, it will be much more difficult to get back to normal.
The Federal Reserve is mandated to foster economic conditions that achieve both stable prices and maximum sustainable employment. This dual mandate drives every action the Fed takes. The upcoming release of the Consumer Price Index on October 12 now becomes even more critical to Fed monetary policy since the Fed’s stated goal is to get inflation back to a sustained level of 2%.
Growth by Industry
Most industries experienced job growth in September. Those leading the gains were leisure and hospitality (+96,000); government (+73,000); and education and health services (+70,000). By contrast, the only industry with negative job growth was information (-5,000). Private payrolls increased by 263,000, with 29,000 in the goods-producing industries and 234,000 in the service-providing industries.
The Bottom Line
The unexpected strength in the September jobs report is the latest sign that the economy continues to grow and show upward momentum. This will pressure the Federal Reserve to continue its restrictive monetary policy for the rest of 2023 and into 2024. In its most recent meeting, the Federal Open Market Committee indicated that it may increase the Federal Funds Rate another 25 basis points by the end of 2023 and will continue to reduce the size of its balance sheet by around $100 billion per month. This will continue to exert upward pressure on interest rates across the yield curve.
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