Overview: U.S. Employment Growth Slowed Sharply from January to September; Unemployment Rate Rose to 4.2%

Supplemented with details from the report and the market reaction throughout the entire process

Lucia Mutikani

Reuters Washington, October 2 - U.S. job growth slowed in September by more than expected, and nonfarm payrolls data for the prior two months were sharply revised downward, rendering the possibility of another interest rate hike by the Federal Reserve this month almost non-existent.

The highly anticipated employment report released by the U.S. Department of Labor on Friday also showed that, with more people entering the labor force, the unemployment rate rose to 4.2% last month from 4.1% in August. The sharp slowdown in job growth may not necessarily signal a sudden deterioration in labor market conditions.

Economists noted that when the Labor Day holiday falls in late September—as it did this year—job data often appear weak. There is currently no sign of widespread layoffs. With robust corporate profit growth and resilient domestic demand, initial jobless claims (link) have remained at their lowest level in 57 years.

Economists said this report once again confirms the labor market’s status as “few hires, few layoffs,” and likely won’t influence short-term monetary policy; inflation remains the key focus.

Olu Sonola, Head of U.S. Economic Research at Fitch Ratings, said: “This is a disappointing jobs report and reminds us that the ‘few hires, few layoffs’ labor market never disappeared. Weak job growth, a slight uptick in the unemployment rate, controlled wage increases, and downward revisions to previous nonfarm payrolls estimates leave the Federal Reserve with little reason to consider a rate hike in October. But the Consumer Price Index (CPI) report remains the most important indicator.”

The Bureau of Labor Statistics reported that after an upwardly revised increase of 133,000 jobs in August, nonfarm payrolls rose by 29,000 last month. Economists surveyed by Reuters had predicted that following August’s previously reported surge of 162,000 jobs, 90,000 jobs would be added in September. Forecasts ranged from as low as 35,000 to as high as 180,000.

Revised data for July showed that the economy lost 10,000 jobs, marking the second negative nonfarm payroll number this year.

Overall, the number of new jobs added in July and August was 60,000 less than previously estimated. The volatility induced by the government’s seasonal adjustment models is likely the main reason for the modest increase in payrolls last month and the downward revision for August.

However, economists said they expect that the escalating headwinds from the war between the U.S., Israel, and Iran (link)—including high energy prices and strained supply chains—will begin to disrupt the labor market by the end of this year and continue until 2027.

Diesel prices have hit historical highs, and the resulting pressure could affect more than just transportation and agriculture. Persistent tariff issues are also a concern; an Institute for Supply Management (ISM) (link) survey released on Thursday showed manufacturers growing increasingly anxious about the trade war with Canada.

Slight employment increase in the healthcare sector

The healthcare sector continued to account for the bulk of job growth, adding 17,000 jobs, a number far below the average monthly gain of 33,000 over the past 12 months. Most of these new positions were in outpatient healthcare services and hospitals. Employment in nursing and residential care facilities dropped by 9,000, which may be related to the termination of “Temporary Protected Status” for hundreds of thousands of Haitian immigrants.

Construction employment increased by 11,000 people, while manufacturing added 9,000. Employment in financial activities declined by 7,000 positions. Despite the near stagnation in job growth last month, average weekly working hours remained unchanged at 34.4 hours.

The CME Group’s FedWatch tool shows that financial markets further lowered the likelihood of the Federal Reserve hiking rates at its October 27-28 meeting to about 13%, down from 22% before the report and around 69% a week earlier. The odds of further monetary tightening had already decreased after August and July inflation data (link) came in below expectations.

Last month, the Federal Reserve (link) raised its benchmark overnight interest rate by 25 basis points to a range of 3.75%-4.00%, its first hike in three years, and signaled it would further increase borrowing costs in the future. Given that inflation remains above the central bank’s 2% target, economists continue to expect a rate hike in December.

U.S. stocks opened higher. The dollar weakened against a basket of currencies. U.S. Treasury yields broadly moved lower.

The rise in the unemployment rate reflects an increase of 485,000 people in the labor force. This pushed last month’s labor participation rate up to 61.8% from 61.6% in August. Household employment increased by 406,000.

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