U.S. job growth slowed for a second consecutive month in September, but hiring remained solid despite growing headwinds from higher interest rates, scorching-hot inflation and mounting recession fears.
Employers added 263,000 jobs in September, the Labor Department said in its monthly payroll report released Friday, slightly topping the 250,000 jobs forecast by Refinitiv economists. It marks a deceleration from the 315,000-job gain recorded in August and matches the lowest monthly gain since April 2021.
The unemployment rate, meanwhile, unexpectedly dropped to 3.5%, returning to the historic low recorded in July as the size of the labor force decreased.
Average hourly earnings also continued to rise, but at a slower pace of 0.3% last month, to $32.46 an hour. Slower wage growth could be evidence that inflation is starting to cool, although it also means that lower-income workers are being hit even harder by higher prices.
Stocks tumbled on Friday morning as investors weighed the news. The Dow fell more than 300 points, while the S&P 500 shed about 1.3%.
"The employment data did little to change the narrative for a Fed committee that has been intensely focused on bringing down inflation," said Charlie Ripley, senior investment strategist at Allianz Investment Management. "The robustness of the post-pandemic labor market conditions continues to be a problem for the Fed as the current policy measures put in place have yet to bring a meaningful slowdown to the economy."
Job gains were broad-based in September, with leisure and hospitality leading the way in hiring, adding 83,000 new workers. That was followed by health care (60,000), professional and business services (46,000), manufacturing (22,000) and construction (19,000).
However, some sectors saw payrolls shrink last month: Financial activities and transportation and warehousing both shed 8,000 jobs in September.
While monthly jobs data is always important, the Federal Reserve is closely watching this particular report for signs the labor market is starting to slow down from its frenzied pace as policymakers try to wrestle inflation, which is still running near a 40-year high, back to 2%.
Fed Chair Jerome Powell conceded during the post-meeting press conference in September that higher rates could "give rise to increases in unemployment."
"We think we need to have softer labor market conditions," Powell said. "And if we want to set ourselves up, really light the way to another period of a very strong labor market, we have got to get inflation behind us. I wish there were a painless way to do that. There isn't."
Fed officials have already approved five straight rate hikes, including three back-to-back 75-basis-point increases, and have shown no signs of slowing down as they reiterate their commitment to crushing inflation. Officials have stressed that interest rates will remain elevated for "some time" until the labor market cools down and prices show real evidence of falling.
For months, the labor market has remained one of the few bright spots in the economy. However, there are growing signs that the labor market is starting to weaken, with a number of major companies, including Alphabet's Google, GE, Apple, Meta and Microsoft, announcing hiring freezes or layoffs in recent weeks.
Jobless claims also increased more than expected last week, with the number of Americans filing first-time unemployment benefits rising to 219,000, a five-week high.
If unemployment benefits continue to climb, it could be a sign that employers are laying off workers as consumers pull back on spending and the economy grinds to a halt. Other data published this week shows that job openings plummeted to the lowest level since early in the pandemic, indicating that employers are putting hiring on the back burner.
The recent softness in the labor market — combined with a still-solid jobs number on Friday — likely will not be enough to deter the U.S. central bank from approving another mega-sized interest rate hike when policymakers meet at the beginning of November.
"This is not good news for the Fed, which wants to see a slowing in the jobs market to ease wage growth and inflation pressure," said David Donabedian, chief investment officer of CIBC Private Wealth. "Today’s report does not give us that and raises the likelihood of a 75 basis point rise in the Fed fund rate next month."