Economy adds 336,000 jobs in September in a stunning gain

The U.S. economy churned out a blockbuster 336,000 jobs in September, smashing economists’ expectations and heightening the risk that policymakers will have to push even harder to slow down the economy.

The data released Friday by the Bureau of Labor Statistics offered yet another snapshot of the job market’s remarkable strength, with the unemployment rate holding at 3.8% and wage growth outpacing inflation in a boost to workers. But it was also the latest example of an economy that simply refuses to slow down, despite the Federal Reserve’s aggressive attempts to get prices and hiring closer to normal levels.

The economy’s defiance has worked out for now, with a recession nowhere in sight. But that could change if the Fed is forced to keep interest rates high for an extended period.

The September report, which showed the largest number of gains since January, had been expected to indicate continued moderation in the labor market, with forecasts of around 170,000 jobs created. Instead, it came in at nearly twice that amount.

“Underlying this report is a labor market that is still incredibly resilient,” said Nick Bunker, the economic research director at the jobs site Indeed. “I think it’s the sign of a labor market that has sustainable strength moving forward.”

Although the figures could point to an overheated labor market, there are signs of stabilization. Data showed that average hourly earnings moderated slightly in September, in positive news for the Fed, which is trying to cool consumer demand as it fights inflation. The average hourly wage rose in September by 4.2% over the previous 12 months to $33.88 an hour, a sharper annual increase than inflation, which climbed to 3.7% in August. But that’s down slightly from the wage growth in the 12 months that ended in August, and the monthly increase remained flat at 0.2%.

Meanwhile, economists say robust job postings are likely to be pulling workers back into the labor force, accounting for the uptick in the unemployment rate in recent months. Still, the overall labor force participation rate and rate for prime-age workers, those between 25 and 54 years old, were flat in September.

Major stock indexes bristled on news of September’s unexpectedly hot jobs report, then recovered, with investors fearing additional interest rate hikes and worry that yields on government bonds will continue to climb sharply. The 10-year Treasury yield, a crucial benchmark that buttresses borrowing rates worldwide, hit 4.88% on Friday, the highest level since 2007. Higher Treasury yields translate into increased prices for consumers and businesses.

The September report caps off 33 months of consecutive job gains and scores a political victory for President Biden, who has endeavored to cement a pro-worker record as he gears up for his reelection campaign after being pummeled for surging inflation last year.

Biden cheered on news of robust job creation as evidence that his “Bidenomics” plan to rebuild the economy and expand the middle class by investing in manufacturing and infrastructure is working.

“Bidenomics is about investing in America and investing in American workers,” Biden said. “We’re creating good jobs in communities all across the country, including in places that have been left behind.”

Payrolls ballooned in a variety of service-related industries in September, with the strongest gains in leisure and hospitality, government, health care, professional and technical services, and social assistance.

The leisure and hospitality sector, which hemorrhaged workers during the pandemic, finally returned to pre-pandemic levels of employment in September, adding 96,000 jobs. Most of those gains were in food and drinking places, while accommodation remains below its pre-pandemic levels.

Government payrolls added 73,000 jobs, with large gains in public state-funded education and local government. Still, the sector has struggled to retain workers amid high rates of burnout tied to understaffing.

Health care, which has been buoying the labor market for months, added 41,000 jobs as an aging population and COVID-related backlogs weighed on the industry.

Manufacturing and construction, both interest-rate-sensitive industries, have remained remarkably resilient - slowing as expected, though continuing to add jobs.

Warehousing, transportation and the information sector, which includes tech and entertainment and boomed during pandemic lockdowns, have slowed as consumer demand has shifted away from goods to services. These industries showed little change in September.

Diane Swonk, the chief economist for KPMG, describes the current dynamic as a “relay race,” with some interest-rate-sensitive sectors running out of steam and handing the baton off to other sectors - keeping the economy firmly out of recession territory.

Still, the jobs report signals a bumpy path ahead for the Fed. Interest rate increases have been designed to cool demand for all kinds of goods and services, including homes and motor vehicles. Companies also were expected to pull back on hiring to offset the growing costs of investing and expanding their businesses. As they hiked rates, Fed officials bet the economy could avoid widespread layoffs if employers simply cut the number of unfilled jobs and reduced hiring to a more sustainable pace.

But the opposite continues to happen. The number of job openings rose in August, from 8.9 million to 9.6 million, according to Labor Department data out this week. And employers continue to hire at breakneck speed. That means the Fed could need to keep raising rates, and hold them higher for longer, until officials are sure that the labor market is slowing in a way that brings down inflation and stabilizes the broader economy.

Much of the Fed’s fight is about taming inflation, which soared to 40-year highs in 2022. There’s been significant progress on that front, with a key inflation measure cooling notably late in the summer. The central bank has made clear it has more work to do to fully snuff out inflation. But the Fed could increasingly have to account for the hot job market, too, in deciding how much further to raise rates.

The Fed meets two more times this year, and central bankers have left the door open for another rate increase.

The labor market faces other headwinds. Although the federal government avoided an end-of-September shutdown, which could have hurt the economy, another looms in November, and congressional Republicans cannot do anything about government funding while they lack a speaker of the House, which they control.

Meanwhile, a season of labor strikes, including the 160,000-strong Hollywood actors work stoppage, going on since mid-July, and about 25,000 autoworkers on strike against the Big Three vehicle manufacturers in Detroit, could put a damper on consumer spending and lead to more layoffs. This week, about 75,000 health-care workers launched a three-day strike against Kaiser Permanente over wages and staffing levels. (The autoworkers strike has not shown up in September’s jobs report.)

Some economists believed the case for another rate increase was fading because Treasury markets have been tightening in ways that can mimic an interest rate hike. In remarks at the Economic Club of New York on Thursday, San Francisco Fed President Mary Daly said the bond market had “tightened quite considerably” since Fed officials convened last month.

“That is equivalent to about a (0.25%) rate hike. And so then the need to do tightening additionally is not there,” Daly said.

Some business say they’re grappling with the effects of both restrictive financial conditions and a tighter labor market.

Near the boardwalk in Rehoboth Beach, Delaware, Patrick Ramos, a manager at Mariachi Restaurant, said this summer was the slowest for business since the start of the pandemic.

“It feels like there’s been a little recession,” Ramos said of the 300-seat Mexican restaurant known for its seafood fajitas. “Everything is more expensive. People don’t want to spend money. We still get busy, but not like we did when people had stimulus checks.”

But hiring remains a big challenge, Ramos said. It’s difficult to find international workers who used to come for the summer and others locally willing to work for the wages the restaurant offers.

“We’re understaffed,” Ramos said. “Before COVID, we had 13 servers on a Friday or Saturday. Now we have eight.”