Job growth cools but still remains solid, driving stocks lower on fears of sharp hike hikes

U.S. job growth slowed for the second month in September as employers added a still-solid 263,000 positions, signaling that high inflation, rising interest rates and a softening economy are finally dinging the resilient labor market.

The unemployment rate fell from 3.7% fell to 3.5%, reclaiming a 50-year low, the Labor Department said Friday. But that's largely because 57,000 Americans left the labor force, which includes people working or looking for jobs, even as payrolls expanded.

Economists surveyed by Bloomberg had estimated that 250,000 jobs were added last month. While the actual gain beat that forecast, it amounted to the smallest advance since April of 2021.

The job market has been remarkably buoyant this year, notching average monthly gains of more than 400,000 despite the economy's challenges and the Federal Reserve's campaign to tamp down rising costs by making borrowing more expensive for consumers and businesses. Worker shortages have prodded many employers to continue hiring and avoid layoffs so they aren't caught flat-footed when activity rebounds.

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"Job growth has slowed substantially over the course of 2022 as economic growth has softened but remains well above its pre-pandemic pace," says Gus Faucher, chief economist of PNC Financial Services Group.

What does the new jobs report mean?

The Fed is scrutinizing the monthly changes in employment to gauge whether inflation is cooling enough for officials to pull back the most aggressive rate hikes since the early 1980s. Those increases have slammed the stock market and raised fears of a recession.

In a sign that worker shortages could persist, the share of adults working or job-hunting edged down to 62.3% last month, leaving it well below the pre-pandemic level of 63.4%. The labor force participation rate generally had been rising and advanced sharply in August as workers returned to a sizzling labor market after caring for children or staying idle because of COVID-19 fears.

Is the jobs market still strong?

The dip in September suggests that finding workers could remain a challenge and push pay increases higher. That likely would further fuel inflation that’s just below a 40-year high.

Last month, average hourly wages rose 10 cents to $32.46, modestly lowering the annual increase from 5.2% in August to 5%, which is still a strong gain.

The renewed drop in participation, as well as the decline in unemployment and solid job gain, likely will help convince the Fed to approve another hefty three-quarters point interest rate hike in early November, economists say.

The report "is still a green light for more Fed rate hikes and higher interest rates," says Jason Schenker, head of Prestige Economics.

Why are stocks down?

Stocks dropped following the release of the report. The Dow Jones Industrial Average finished the day down 2.1%. The S&P 500 fell 2.8% and Nasdaq dropped by 3.8%. Yields on US Treasury notes jumped higher with the 2-year note touching nearly 4.3% and the 10-year at 3.9%.

Markets are worried the Fed could see Friday's report as proof the economy hasn’t slowed enough yet to get inflation under control. That could clear the way for continued, aggressive hikes to interest rates, something that risks causing a recession if done too severely.

What industry is hiring right now?

Leisure and hospitality, which includes restaurants and bars, the sector hit hardest by the pandemic, led the job gains with 83,000, though it remains 1.1 million short of its pre-COVID level. Health care added 60,000 and professional and business services, 46,000.

Manufacturing added 22,000 jobs as U.S. consumers continued to snap up goods even as a strong dollar hurt exports. And construction added 19,000, with companies still desperate to add workers because of longstanding labor shortages despite the downturn in the housing market.

But the public sector shed 25,000 jobs, largely because fewer school staffers returned to work last month than before the pandemic, reducing employment after seasonal adjustments.

Is a recession coming in 2023?

Many economists now believe the Fed rate hikes will tip the nation into a recession next year and the uncertainty is starting to take a toll on hiring. Payroll gains slowed from more than 500,000 in July to about 300,000 in August.

During that period, job openings – a gauge of future hiring -- fell sharply from a near-record 11.2 million to a still robust 10.1 million. With 1.7 vacancies for every unemployed person, workers still wield bargaining power. But that’s down from two openings per jobless worker the prior month.

Initial jobless claims, a measure of layoffs, last week rose to the highest level since late August but remain historically low. Announced job cuts surged 46% last month and employers unveiled plans to hire 380,000 workers, the lowest September total since 2011, according to Challenger Gray & Christmas, an outplacement firm.

Also curtailing employment last month: Employers brought on 1.3 million teens and young adults for the summer season and most returned to school, Goldman Sachs wrote in a research note.

Is there still a worker shortage in 2022?

At the same time, worker shortages are still plaguing most industries and many firms have resolved not to lay off employees even as the outlook darkens.

“Companies still don’t want to lose the talent – especially talent with tech skills – that they’ve worked so hard to win,” says Nicola Hancock, managing director of the Americas region for AMS, a talent acquisition and advisory firm. “Even though the U.S. economy is contracting, we are still experiencing the most painful skills shortage we’ve seen in our history.”

The upshot: An unusual split in a cooling labor market, with some employers growing more cautious even as others continue to hire or at least avoid job cuts.

“Hospitality and airlines, for example, remain in catch-up mode having cut deeply through the pandemic,” Hancock says.

Tyler Sebastian, a cook and kitchen manager at a drug and alcohol rehab center in Garberville, California, was told this week the facility is closing.

The 32-year-old isn’t worried about finding a new position, though he is concerned he’ll have to take a pay cut after getting steady raises at the center during his four-year tenure. “There are jobs there,” he says. "I’m confident I will find something.”

What is the job market outlook?

Many economists expect the job market to lose steam more rapidly now that the nation has recovered all 22 million jobs lost in the health crisis and high inflation and interest rates are starting to dampen consumer and business spending.  Monthly gains will likely fall to about 100,000 by the end of the year, according to Moody’s Analytics.

“Employment growth should decelerate more quickly as employers reduce hiring against a backdrop of a slowing economy and declining corporate profits,” economist Nancy Vanden Houten wrote in a note to clients.

Contributing: Elisabeth Buchwald

This article originally appeared on USA TODAY: US jobs report: Economy added jobs amid high inflation, rising rates