The Labor Market is Cooling But is Still Too Hot

The U.S. labor market continued to cool in September, adding 263,000 jobs in the month. However, the unemployment rate dropped back to 3.5% and the labor force participation rate dropped to 62.3%, reflecting the continued very tight labor market. Wage growth slowed to 5.0% but it remains high and is continuing to pressure inflation. The jobs report underscores the struggle the Fed faces in its goal to soften the labor market and bring down inflation.

Top Takeaways from the Report

September Job Growth Continued to Slow

The U.S. labor market continued to slow in September, adding 263,000 jobs over the last month. This is lower than the 315,000 jobs added in August and is slightly higher than expectations for the month. It is also down from the average of 420,000 jobs added per month in 2022. However, this is much higher than the monthly average job growth of 167,000 during the last expansionary period in the 2010s.

The unemployment rate unexpectedly dropped back to a 50-year low of 3.5% in September, down from 3.7% in August. This is a more troubling sign that the very tight labor market is not loosening. Demand for labor still far exceeds the supply of available labor and the unemployment rate is still far below the level considered to be “full employment”. In a separate report, the Labor Department said the number of job openings eased to 10.1 million in August from 11.2 million the month before. This shows a slight slowing in labor demand but it is still above the pre-pandemic level in 2019, when job openings averaged 7.2 million a month. There are still around two job openings for every unemployed worker.

Another disappointing indicator from the monthly jobs report was a decrease in the labor force participation rate, which fell to 62.3% in September compared to 62.4% the previous month. This further reflects a constrained labor market and the participation rate is still one percent below the level of 63.4% before the pandemic began. While labor participation of prime-age workers (25-54 years old) has nearly returned to pre-pandemic levels, the participation of workers 55 and older remains far below levels in 2019.

The Federal Reserve has been particularly focused on wage increases, since wage growth drives price increases. The latest jobs report showed that year-over-year wage growth slowed slightly to 5.0% in September compared to 5.2% the previous month and month-over-month wage growth remained at 0.3% in September. This wage growth is still too strong to help ease inflationary pressures and it is much higher than the long-term average of around 3%.

Price inflation continues to come in stubbornly high. The latest Consumer Price Index showed that while headline price increases may have peaked, inflationary pressures remain too strong. The headline CPI dropped slightly, to 8.3% in September compared to 8.5% the previous month. However, core CPI, which excludes food and energy, accelerated to 6.3% in September, compared to 5.9% in August. This inflation is far away from the Fed’s goal of 2% annual price increases.

Growth by Industry

The private-sector added 288,000 jobs in September, with the goods-producing industries adding 44,000 jobs and the service-providing industries adding 244,000 jobs. Employment in leisure and hospitality continued its strong growth in September, adding 83,000 jobs over the previous month. However, employment in the industry is still 1.1 million below its pre-pandemic level in February 2020.

Other notable job gains occurred in education and health services (+90,000), professional and business services (+46,000), manufacturing (+22,000), and construction (+19,000).

Employment in government contracted slightly in September, dropping 25,000 jobs over the month. The financial activities sector also shed jobs in September, with a loss of 8,000 jobs in the month.

The Bottom Line

The September jobs report is another sign that the labor market remains too strong and the Federal Reserve’s job is not done. The drops in the unemployment rate and labor participation reflect that the demand is still outstripping the supply of workers. Wage growth also remains stubbornly high and is adding to inflationary pressure.

Markets have been hoping that a weaker jobs report would give the Fed some flexibility in its monetary policy path. But the strength of the labor market, coupled with persistently high price inflation essentially ensures that Fed rate increases will continue over the next several months.

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The division of Economics and Public Policy at Zions Bank informs and educates employees, clients, and the community-at-large by providing insight and analysis on issues related to local, national and global economic trends as well as federal banking policies. The primary goal of the Economics and Public Policy team is to help individuals and businesses understand important issues that can impact their daily financial decisions. For more information and analysis, please visit www.zionsbank.com/economy.

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