Payrolls rose by 336,000 in September

Job growth was stronger than expected in September, a sign that the U.S. economy is struggling despite rising interest rates, labor strife and dysfunction in Washington.

Nonfarm payrolls increased by 336,000 for the month, better than the Dow Jones estimate of 170,000 and more than 100,000 higher than the previous month, the Labor Department said Friday in a long-awaited report. The unemployment rate was 3.8%, compared to expectations of 3.7%.

Shares initially fell after the report but regained direction during the morning. The Dow Jones Industrial Average accelerated more than 150 points after two hours of trading, while Treasuries fell, although still positive during the session, with the 10-year bond gaining 4.77%, up about 0.05 percentage point.

The salary increase was the best monthly figure since January.

“Slowdown? What slowdown? The US labor market continues to show amazing strength, with the number of new jobs created last month nearly double what was expected,” said George Mathieu, chief investment officer at Key Private Bank.

Investors have been on guard lately that a resilient economy could force the Fed to keep interest rates high and possibly raise them further as inflation continues to rise.

However, wage increases were lower than expected, with average hourly earnings rising 0.2% for the month and 4.2% over last year, compared to estimates of 0.3% and 4.3%, respectively.

However, traders in the federal funds futures market have increased the odds of a rate increase before the end of the year to about 43%, according to tracking by CME Group.

“This clearly raises expectations that the Fed is not done yet,” said Liz Ann Saunders, chief investment strategist at Charles Schwab. “All else being equal, it would likely move the starting point for rate cuts, which has been a moving target, to later in 2024.”

Saunders said the bond market is “in the driver’s seat” relative to stocks, a trend that accelerated earlier in the week after the Labor Department reported a jump in job openings for August.

From a sector perspective, the leisure and hospitality sector led with 96,000 new jobs. Other gainers included government (73,000), health care (41,000) and professional, scientific and technical services (29,000). Motion picture and sound recording jobs are down 5,000 and down 45,000 since May amid a labor impasse in Hollywood.

Service-related industries contributed 234,000 jobs to total job growth, while goods-producing industries added only 29,000 jobs. Average hourly wages in the leisure and hospitality sector remained stable on a monthly basis, although they were 4.7% higher than last year.

The private sector payroll gain of 263,000 was far ahead of a report earlier this week from ADP, which indicated an increase of only 89,000.

In addition to a strong September, the past two months have seen significant upward revisions. August’s gain now stands at 227,000, up 40,000 from the previous estimate, while July rose to 236,000 from 157,000. Combined, the two months were 119,000 higher than previously reported.

The household survey, which is used to calculate the unemployment rate, was slightly lighter, rising by 215,000.

The labor force participation rate, or those working against the overall size of the workforce, held steady at 62.8%, half a percentage point below the pre-Covid level. The rate was also unchanged in the 25 to 54 age group at 83.5%. A more comprehensive measure of unemployment that includes discouraged workers and those holding part-time jobs for economic reasons fell to 7%.

The September report comes at a critical time for markets and the economy.

Treasury yields rose and stocks fell on concerns that a still-hot economy could keep Federal Reserve policy tight. The central bank has raised interest rates 5.25 percentage points since March 2022 in an attempt to curb inflation, which remains well ahead of the Fed’s 2% target.

In recent days, many policymakers have said they remain concerned about inflation. They largely cautioned that although whether another rate hike before the end of the year is an open question, interest rates are almost certain to remain at a high level “for some time.”

Although market prices do not give much chance of the Fed raising interest rates again, the higher narrative for a longer period has been causing concern for investors. Higher interest rates raise the cost of capital and run counter to the easy monetary policy that has powered Wall Street for much of the past 14 years.

A strong labor market is key to the pricing equation.

Policymakers feel that the tight employment profile will continue to put upward pressure on wages, which will push prices higher. Fed officials said they don’t believe wages played a role in the rise in primary inflation in 2021-2022, but they have become more of a factor recently.