Work Report September 2022:

U.S. job growth falls short of expectations as Fed hikes rates

The Labor Department reported on Friday that employment growth was slightly less than expected in September and the unemployment rate fell despite the Federal Reserve’s efforts to slow economic growth.

Nonfarm payrolls increased by 263,000 this month, compared with the Dow Jones estimate of 275,000.

The unemployment rate was 3.5% versus expectations for 3.7%, as the labor force participation rate edged down to 62.3% and the size of the labor force fell by 57,000. A more comprehensive measure, which includes frustrated workers and those working part-time for financial reasons, saw a steeper decline, from 7% to 6.7%.

The September payrolls figure slowed from 315,000 in August and tied for the lowest monthly gain since April 2021.

In the closely watched wage data, average hourly earnings rose 0.3% month-over-month, in line with expectations, and up 5% year-over-year, still well above pre-pandemic normal, but 0.1 percentage points below expectations.

Stock futures traded lower after the news, while government bond yields rose. Investors are watching the numbers to see how the Fed will react as it tries to rein in inflation.

“This is another 75 [basis point rate increase] said Jeffrey Roach, chief economist at LPL Financial. A basis point is 0.01 percentage points.

By industry, leisure and hospitality led the gains with an increase of 83,000 jobs, which still left the industry 1.1 million jobs shy of February 2020 pre-pandemic levels.

Elsewhere, healthcare rose by 60,000, professional and business services by 46,000 and manufacturing by 22,000. Construction increased by 19,000, while wholesale trade increased by 11,000.

A 25,000 loss of government jobs was the main reason the report missed expectations. Hiring at the state and local levels is highly seasonal, so the decline suggests the report was largely in line with expectations and showed a resilient job market.

Also on the downside, financial activity and transportation and warehousing both lost 8,000 jobs.

The report comes as the Federal Reserve struggles to bring inflation down near its highest annual growth rate in more than 40 years. The central bank has raised interest rates five times this year, for a total of 3 percentage points, and is expected to continue raising rates at least until the end of the year.

Despite the increase, job growth remained relatively strong as companies faced a large mismatch between supply and demand, leaving about 1.7 vacancies for every available worker. That, in turn, has helped push wages up, although average hourly earnings have risen well below inflation, which recently stood at 8.3%.

Fed officials, including Chairman Jerome Powell, have said they expect rate hikes to bring “some pain” to the economy. FOMC members said in September they expected the unemployment rate to rise to 4.4% in 2023 and stay there before falling to 4% over the long term.

The market generally expects the Fed to continue raising interest rates by 0.75 percentage points in November. Traders see a 78% chance of a three-quarters move following the jobs data release and expect another half-point gain in December, which would put the federal funds rate in the 4.25%-4.5% range.

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