September Jobs Growth Was Shockingly Strong, But Maybe Not Enough for Another Fed Rate Hike

Jobs gains in the U.S. economy came in hot in September, reversing the summer’s softening trend. But a look under the hood suggests Federal Reserve officials may still opt to keep interest rates steady when they next meet.

“Today’s data suggests the downtrend in job growth has abated,” says Preston Caldwell, chief U.S. economist at Morningstar, “but that won’t push the Fed to hike rates again.”

The U.S. economy added 336,000 jobs in September, according to the latest report from the Bureau of Labor Statistics. That’s twice as many as economists expected. Nonfarm payroll employment had been forecast to rise by 159,000, according to FactSet.

Meanwhile, the unemployment rate was unchanged at 3.8%. It had been expected to tick down to 3.7%.

“Today’s numbers show robust job growth without overheating in the labor market,” Caldwell says. “Unless the upcoming inflation data turns out very poorly, we see little reason for the Fed to hike the federal funds rate at its next meeting.”

September Jobs Report Key Stats

• Total nonfarm payrolls climbed by 336,000 versus a revised 227,000 in August.
• The unemployment rate held steady at 3.8%.
• Average hourly wages increased by 0.2% to $33.88 after rising 0.2% in August.

“The data raises the possibility that the prior downtrend in job growth, which started around the beginning of 2022, has stopped,” Caldwell says. “But it certainly doesn’t foreclose the possibility that the downtrend will renew.”

While headlines focus on the large month-over-month increase in nonfarm payroll employment, Caldwell says it’s never a good idea to be heavily influenced by a single month’s data point, given the inherent noise in the data.

“To smooth out the noise, we take a three-month moving average, which shows job growth of 2.1% annualized in the past three months. That’s an uptick compared to the 1.6% growth in the prior three months [April to June 2023], though not a dramatic one.”

Unemployment Rate Holds Steady

The unemployment rate came in at 3.8% for the second month in a row, above its pre-pandemic February 2020 rate of 3.5%. For the past year, the rate has been bouncing within a narrow range of 3.4%-3.8%.

“The continued strength of employment growth has likely been driven more by expanding labor supply than labor demand,” Caldwell says. This is reflected in the continued downtrend in wage growth of 4.2% year over year in the third quarter—down from 4.5% at the start of the year, by Caldwell’s measure. “Labor supply is being driven upward by higher labor force participation, as well as solid population gains.”

“Most of the excesses of the post-pandemic labor market have normalized to a great degree,” Caldwell says. The job openings rate averaged 5.6% in the last three months, down from a peak of 7.2% in early 2022, albeit still above the 2019 average of 4.5%. “The quits rate has essentially returned to normal.”

Wage Growth Decelerates

Average hourly earnings grew by 7 cents, or 0.2%, to $33.88 in September, just below its 10-year average growth of 0.3%. Over the past 12 months, average hourly earnings have increased by 4.2%.

The average workweek for all employees on private nonfarm payrolls was unchanged at 34.4 hours in September. For manufacturing employees, the average workweek increased to 40.1 hours in September, and overtime was unchanged at 3.1 hours. For production and nonsupervisory employees, the average workweek fell to 33.8 hours from 33.9 the prior month.

Average weekly hours worked were flat in the past three months by Caldwell’s measure, after having declined at a 0.9% annualized rate in the first six months of 2023. “Falling average hours had allowed firms to contain labor costs even as job gains remained solid,” he says.

“If we don’t see a renewed decline in average hours and job growth begins accelerating again, then the growth in labor costs will eat into firms’ profits,” Caldwell says, “unless there’s an accompanying acceleration in GDP growth.”

Healthcare and Leisure Sectors Lead Job Gains

“The industry composition of job gains has remained fairly consistent,” Caldwell says, with healthcare and leisure leading the growth. Job growth in these sectors remains very strong at 4.3% annualized in the past three months, by Caldwell’s measure. “This accounts for the lion’s share of aggregate job gains,” he says. “But with consumption growth in these industries slowing down as post-pandemic normalization wraps up, healthcare and leisure employment growth is likely to slow.”

In September, leisure and hospitality added 96,000 jobs, above the past year’s average gain of 61,000 per month. Jobs in food services and drinking places rose by 61,000 over the month, returning to its pre-pandemic February 2020 level.

In September, government jobs increased by 73,000, above the average monthly gain of 47,000 over the past year. Healthcare added 41,000 jobs, just below the average monthly gain of 53,000 over the prior 12 months.

Selected Payroll Categories

Three-month increase.

September Jobs Report Unlikely to Change the Fed’s Trajectory

Caldwell says the Fed may prefer job gains to be a bit weaker to ensure inflation is tamed, “so today’s data might incrementally nudge the Fed toward tighter monetary policy.” Overall, though, he believes inflation data, which has shown good news in recent months, will continue to hold the most weight. “Additionally, the large runup in bond yields in the last month constitutes an effective monetary tightening,” he says.

In the wake of the report, 69.4% of the bond market expects the Fed to hold rates steady at the current range of 5.25%-5.50%, according to the CME FedWatch Tool, which tracks bets made by traders on the direction of interest rates. The remaining 30.6% expect the Fed to increase rates, which it hasn’t done since July.

Further out, 54.8% of bond market participants expect the Fed to hold rates at current levels through December. Roughly a third expect the target rate to rise to a range of 5.50%-5.75% by the end of the Dec. 13 meeting. Just 6.4% foresee the Fed raising rates to a higher range of 5.75%-6.00% by that time.