U.S. Added 248,000 Jobs in September, Unemployment Rate Falls to 5.9%

The U.S. economy added 248,000 jobs in September, well above expectations, as labor markets rediscovered the momentum gained earlier this year. The headline unemployment rate dropped to 5.9%, its lowest level in six years.

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Economists predicted 215,000 new jobs and an unemployment rate that would hold steady at 6.1%.

The better-than-expected September figures are certain to rekindle the debate over the timing and trajectory of interest rate hikes by the Federal Reserve, as the positive report will have many economists looking for rates to move higher sooner rather than later.

“Buoyant labor market data, plus signs that the U.S. economy is growing strongly despite slower growth elsewhere in many countries, adds to the likelihood of the Fed being the first major central bank to hike interest rates,” Chris Williamson, chief economist for research firm Markit said.

“Further robust data in coming months will fuel expectations that the first rate hike could occur early next year, earlier than current expectation of a mid-year hike, though policymakers will want to see wage growth revive before being comfortable with raising households’ borrowing costs,” Williamson added.

In August the economy generated 180,000 new jobs, which was revised up but still lower than expected. The economy has added an average of 213,000 jobs each month over the past year, according to figures released Friday by the U.S. Labor Department..

As has been the case in recent months, economists are looking well beyond the headline unemployment rate and the number of jobs created to other statistics, such as hourly wages, that offer a broader gauge of the health of labor markets.

The Labor Department said average hourly earnings for all employees on private nonfarm payrolls fell by 1 cent to $24.53. Over the past 12 months, average hourly earnings have risen by 2%.

Economists believe wage growth will be one of the most important indicators to watch over the next few months as the Federal Reserve determines when and how to raise interest rates and otherwise wind down the massive stimulus policies initiated in the wake of the 2008 financial crisis.

Wage growth has risen just over 2% year-over-year, a slight improvement over previous months when the rate hovered around 1.5%, but still well below the 3%-3.5% rate the Fed views as necessary to keep inflation at its desired 2% target rate.

Fed Chair Janet Yellen has frequently highlighted wage growth as an indicator the Fed is watching for signs that labor markets are strengthening beyond the declining headline unemployment rate. Yellen has cited stagnant wage growth as a sign of “slack” in the labor market that needs to tighten before the Fed will raise interest rates.

But there’s a downside to rapid wage growth: inflationary pressure. When wages rise too quickly it can lead to runaway inflation and eventually cut into corporate profits.

Indeed, wage growth and other inflationary indicators are at the heart of a heated debate within the Fed over the timing and trajectory of rate hikes. The consensus among Fed economists is that hikes should and will occur in mid-2015, soon enough to head off runaway inflation but still kept low long enough to continue providing stimulus to the fragile economic recovery.

When rates do move higher it will raise borrowing costs, making it more expensive for consumers to get a mortgage or a car loan, or for small businesses to get a loan for expansion. So-called inflation ‘doves’ at the Fed fear raising borrowing costs could stall the recovery.

Meanwhile, an increasingly vocal group of Fed inflation ‘hawks’ has called for rates to move higher sooner rather than later, possibly as early as the first quarter of 2015 to eliminate any likelihood of an over-heated economy. They argue that keeping rates low will invite runaway inflation and lead to asset bubbles.

Some influential economists believe wages will likely get a six-month window during which higher wages will be welcomed as a contribution to the economic recovery. After that, economists will start to worry about whether higher wages are fueling an overheated economy.

In September, job growth occurred in professional and business services, retail trade, and health care, according to the Labor Department. Professional and business services added 81,000 jobs in September, compared with an average gain of 56,000 per month over the prior 12 months. Employment in retail trade rose by 35,000 in September. Food and beverage stores added 20,000 jobs, as workers who had been off payrolls in August due to employment disruptions at a grocery store chain in New England returned to work. Health care added 23,000 jobs in September, in line with the prior 12-month average gain of 20,000 jobs per month.