The U.S. labor market was remarkably strong. That doesn’t mean Federal Reserve policymakers can be satisfied that this will continue.
The U.S. labor market was remarkably strong. That doesn’t mean Federal Reserve policymakers can be satisfied that this will continue.
The Labor Department reported Friday that the U.S. added a seasonally adjusted 336,000 jobs in September compared with the previous month – more than the upwardly revised gain of 227,000 in August and the largest increase since January. The unemployment rate remained at a low 3.8%. The average hourly wage increased by 4.2% compared to the previous year. That was the smallest increase since June 2021, but with economists forecasting consumer prices rose 3.6% year-on-year in September, wages also appear to have significantly outpaced inflation.
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The Labor Department reported Friday that the U.S. added a seasonally adjusted 336,000 jobs in September compared with the previous month – more than the upwardly revised gain of 227,000 in August and the largest increase since January. The unemployment rate remained at a low 3.8%. The average hourly wage increased by 4.2% compared to the previous year. That was the smallest increase since June 2021, but with economists forecasting consumer prices rose 3.6% year-on-year in September, wages also appear to have significantly outpaced inflation.
So good news for American workers. But not so much for bond investors worried about the Fed. Futures markets still suggest the central bank is likely to keep monetary policy unchanged for the rest of the year, but the chances of a final quarter-point rate hike rose after Friday’s report.
The bigger problem is that even if inflation continues to cool, a strong labor market will give the Fed less reason to cut rates next year. This longer-term high scenario naturally leads to higher long-term interest rates. Treasury bonds fell on Friday, pushing yields higher.
Employment increases appear to be continuing. Layoff activity was subdued and weekly jobless claims – historically an early warning sign of trouble in the labor market – remained fairly low. Both the number of job openings and the rate at which people quit their jobs have declined over the past year, but still suggest that many employers are struggling to fill positions and are competing for workers as a result.
Even though there are now 4.5 million more jobs in the United States than before the pandemic began, some companies still appear to be suffering from staff shortages. The healthcare sector in particular added 40,900 new jobs last month, but compared to the 2015-2019 trend, there are still about 660,000 fewer jobs there than expected.
Nevertheless, the economy faces significant headwinds in the fourth quarter, not least from the sharp rise in long-term interest rates. The 10-year Treasury yield rose to 4.78% on Friday, near the highest level reached on Tuesday since August 2007. The average 30-year mortgage rate among lenders surveyed by Freddie Mac in the week ending Wednesday was 7.5%. The last time mortgage rates were this high was December 2000.
The labor market has also historically been a lagging economic indicator that can go from good to bad in a short period of time. For example, until the end of 2007, new jobs were created in the USA, but from the beginning of 2008 there were increasing job losses. Worse, these losses were underestimated: When Fed policymakers met in August 2008, just before the financial crisis truly erupted, the Labor Department had reported that the economy had lost 463,000 jobs in the previous seven months. With revisions, the data now shows that 906,000 jobs were lost.
The fact that a hot labor market can also cool is hardly a reason for the Fed to cut interest rates. But as it looks like the central bank is finally winning its battle against inflation, it must be careful not to sputter America’s jobs engine.
Write to Justin Lahart at [email protected]
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