U.S. economy adds 263,000 jobs in September, unemployment rate falls to 3.5%

Job growth slowed for a second month in September as a series of supersized interest rate hikes permeated the U.S. economy, but the softer nonfarm payroll gain is still unlikely to deter policymakers from aggressive monetary action to fight inflation that remains at a decades-high.

Here are highlights from the latest monthly jobs report released by the Labor Department on Friday, compared to consensus estimates from Bloomberg.

  • Non-farm payrolls: +263,000 vs. +255,000 expected

  • Unemployment rate: 3.5% vs. 3.7% expected

  • Average hourly earnings, month-over-month: +0.3% vs. +0.3% expected

  • Average hourly earnings, year-over-year: +5.0% vs. +5.0% expected

The cool-off in September employment data is a welcome sign for Fed officials trying to tamp down an extraordinarily tight labor market that has placed upward pressure on wages and contributed to soaring prices. However, the print remains substantially higher than the 150,000-200,000 average that was typical before the pandemic, leaving room for the U.S. central bank to proceed with hefty rate increases.

“Today’s job number is a hawkish reading, with almost all the elements of the report moving in the wrong direction for the Fed," Principal Global Investors Chief Global Strategist Seema Shah said in a note.

Stocks plunged and Treasury yields spiked on Friday as investors digested the data after hoping a larger decline in the headline number would encourage sooner policy shift by the Fed.

"Payrolls were broadly in line with expectations but, importantly in this good news is bad news: markets were hoping for a downside surprise today," Shah added. "Instead, the number only confirms that the Fed needs to hike rates by a fourth consecutive 0.75% in November.”

Despite the drop off in jobs added during the month, the unemployment rate fell to 3.5%, while economists had expected the figure to hold at 3.7%. The labor force participation rate in September ticked down slightly to 62.3% from 62.4% the prior month.

Average hourly earnings, a closely watched part of the report, rose 0.3% over the month, on par with both the prior reading and Wall Street expectations. On an annual basis, wages slipped slightly to 5.0% from 5.2% in August, also in line with estimates.

“To the extent that there are any implications for the Fed, the data brings us back to where we were before last month,” Jefferies economists Thomas Simons and Aneta Markowska said in commentary. “There is not a lot of capacity for the labor force to grow, and thus, strong wage pressure is going to continue to be an issue."

At the industry level, the leisure and hospitality sector was again among standout gainers, with 83,000 jobs added in September. The figure marks a jump from 31,000 in the prior month but is in line with the average monthly increase over the first eight months of the year.

Although hiring continues in the sector and the broader labor market has completed its pandemic recovery, employment in leisure and hospitality remains 1.1 million jobs, or 6.7% below the pre-COVID level.

September payroll gains in health care brought the industry back to its February 2020 level with 60,000 jobs added across ambulatory health care services and hospitals.

Job growth in professional and business services continued an upward trend last month but climbed at a slower pace, up by 46,000 payrolls in September compared to the industry's 2022 average of 72,000 per month.

Manufacturing jobs rose by 22,000 in September, below this year's average so far of 36,000 jobs per month. Employment in construction continued grew by 19,000 on par with the monthly average of around 18,000 in 2022.

Meanwhile, payrolls fell by 8,000 in the transportation and warehousing sector and the financial services sector.

In any case, members of the Federal Reserve have consistently asserted that restrictive policy will be necessary for a sustained period of time until price stability is restored, with inflation still stubbornly high. The Consumer Price Index (CPI) in August rose at an annual rate of 8.3%, well above the Fed's inflation target of 2%.

Minneapolis Federal Reserve Bank President Neel Kashkari said on Thursday that he and his central bank colleagues have further work to do to bring inflation down and are "quite a ways away" from pausing on raising interest rates, even as employment data this week has shown signs of a cooling labor market.

"Today's report, coupled with the recent job opening report indicating that job openings are beginning to weaken, underscore that the Fed's tightening campaign as painful as it is, is beginning to slow down activity," LPL Financial Chief Global Strategist Quincy Crosby said in a note. "Still, the market's initial negative reaction underscores that inflationary pressures are not decreasing fast enough for the market to be convinced that the Fed is closer to the end of its tightening cycle."

Alexandra Semenova is a reporter for Yahoo Finance. Follow her on Twitter @alexandraandnyc

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