U.S. job creation slowed to 261,000 last month — but it’s still too strong for the Fed

Although the increase in hiring was the smallest since April 2021, it was still historically strong. The U.S. added an average of 200,000 new jobs a month in the five years before the pandemic.

The unemployment rate, meanwhile, rose to 3.7% from 3.5%, the government said Friday, as more people lost jobs and the size of the labor force shrank a little bit. Those might be signs of a chink in a heavily armored labor market.

Fed Chairman Jerome Powell said on Wednesday the labor market is “out of balance” because there’s too many job openings and too few people to fill them.

Fed officials worry the labor shortage is driving up wages and making it harder for them to reduce inflation back to precrisis levels of 2% or so. The cost of living has risen 8.2% in the past year, one of the highest increases since the early 1980s.

Layoffs and unemployment are likely to increase, however, if the Fed keeps raising U.S. interest rates as expected. The central bank could push a key short-term rate to as high as 5% by next year from near zero just nine months ago.

Rising interest rates slow the economy and sometimes trigger recessions. Many economists predict a downturn is likely by next year. Powell himself admitted the odds of avoiding a recession have fallen due to persistently high inflation.

In October, wages grew 0.4%. Average hourly pay rose slightly in September to $32.58, lowering the increase over the past year to 4.7% from 5%.

It’s the first time in almost a year that the rate of wage growth has dropped below 5%. Before the pandemic, they were rising around 3% a year.

Another potential pressure valve for the economy showed little progress, however. The so-called participation rate — or share of working-age people in the labor force — dipped to 62.2% from 62.3%.

After some back and forth, U.S. stocks rose in premarket trades after the report. Until hiring slows a lot further and unemployment rises, the Fed is unlikely to take its foot off the monetary brakes.

Key details: Employment rose last month in every major part of the economy.

The health-care industry added 53,000 new jobs to lead the way, followed by professional businesses (43,000), leisure and hospitality (35,000) and manufacturing (32,000).

Employment gains in September and August were revised up by a combined 29,000.

Big picture: The economy is slowing — almost every major indicator is much softer compared to earlier in the year.

The labor market is one of the few exceptions.

Normally that’s a good thing, but the Fed thinks the the labor market is too strong for its own good. The series of rate hikes undertaken by the central bank is bound to slow hiring even further and cause unemployment to rise in the months ahead.

The potential saving grace, Powell and some other economists say? Businesses have struggled so hard to hire people amid a labor shortage that they might not lay off as many people as they usually do when the economy goes sour.

Looking ahead: “This is too strong. The Fed wanted to see slower job growth,” said chief economist Gus Faucher of PNC Financial Services. “This actually makes a recession more likely because it means the Fed is going to keep raising rates.”

“The labor market is still cruising for now, but the seas may get rougher ahead,” said Nick Bunker, head of economic research at Indeed Hiring Lab.

Market reaction: The Dow Jones Industrial Average
DJIA,
-0.46%
and S&P 500
SPX,
-1.06%
were set to open lower in Friday trades. The yield on the 10-year Treasury note
TMUBMUSD10Y,
4.145%
rose to 4.19%.

Corrected increase in new jobs in October.