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Good Economic News is Bad Inflation News

The U.S. added 336K jobs in Sept. – far above expectations for 162K. It says good things about the economy, but the Fed will see a big red flag in its inflation fight.

WASHINGTON (AP) – The nation’s employers added 336,000 jobs in September, an unexpectedly robust gain and the largest monthly rise since January, evidence that many companies remain confident enough to keep hiring despite high interest rates and a hazy outlook for the economy.

Last month’s job growth jumped from a 227,000 increase in August, which was revised sharply higher. July’s gain was also healthier than had been initially estimated.

The economy has now added an average of 266,000 jobs a month for the past three months, a streak that could make it likelier that the Federal Reserve will raise its key rate again before year’s end as it continues its drive to tame inflation.

Friday’s report from the Labor Department also showed that the unemployment rate was unchanged at 3.8%, not far above a half-century low.

The job market has defied an array of threats this year, notably high inflation and a rapid series of Fed interest rate hikes that were intended to conquer it. Though the Fed’s hikes have made loans much costlier, steady job growth has helped fuel consumer spending and kept the economy growing, defying long-standing predictions of a forthcoming recession.

Though the strong September job gain could lead the Fed to consider additional rate hikes, some economists pointed to signs that might suggest otherwise. They noted that wage growth slowed in September, with average hourly pay rising 4.2% from a year earlier.

That was still healthy and slightly above inflation but the slowest pace in more than two years. The Fed has been concerned that if pay rises too fast, companies will raise prices to cover their higher labor costs, thereby fueling inflation. September’s slower pace of wage growth might help allay that concern.

In addition, long-term interest rates have spiked in the past two months, making loans more expensive across the economy and potentially serving as a brake on economic growth and inflation. Other threats to the economy have also emerged in recent weeks, including rising energy prices, the resumption of student loan payments, widening labor strikes and the ongoing threat of a government shutdown.

Collectively, some economists said, those challenges might persuade the Fed to leave rates unchanged through year’s end.

“It’s a pretty solid report and perhaps it makes the Fed a little bit more nervous just given the overall strength of the jobs market,” said Sarah House, senior economist at Wells Fargo. But the jump in interest rates “is doing some of the Fed’s work for it, and that makes another hike less compelling.”

Most large industries added jobs last month, from health care, which gained 66,000, to manufacturing, which added 17,000, to retailers, which added nearly 20,000. Professional services, a category that includes engineers and architects, gained 21,000. Government at all levels added 73,000 jobs, reflecting the healthy budgets of most state and local governments.

The Fed’s inflation fighters have been scrutinizing every scrap of data to determine whether to raise their key rate once more this year. On Thursday, Mary Daly, president of the Federal Reserve Bank of San Francisco, said that the Fed could stop raising rates if the job market kept slowing and inflation kept easing. Last week, a price gauge closely tracked by the Fed showed that measures of underlying inflation slowed in the latest sign that overall price pressures were still moderating.

“If we continue to see a cooling labor market and inflation heading back to our target, we can hold interest rates steady and let the effects of policy continue to work,” Daly said in remarks to the Economic Club of New York.

Job growth has remained resilient for most of the past 2 1/2 years even after high inflation flared and the Fed jacked up interest rates at the fastest pace in four decades. The Fed’s benchmark rate stands at a 22-year high of roughly 5.4% after 11 hikes beginning in March 2022. The central bank’s rate increases have led to much higher borrowing costs for consumers and businesses across the economy.

On the one hand, Fed officials, including Chair Jerome Powell, have stressed that inflation remains too far above their 2% target and that another rate hike might be needed to slow it to that level. At the same time, several Fed policymakers have underscored that they want to be careful not to raise borrowing rates so much as to trigger a deep recession.

After a period in the spring when traders seemed to expect the Fed to reverse course and cut interest rates soon, the financial markets now recognize that the central bank will keep its key rate elevated well into 2024. That’s one reason why the yield on the 10-year Treasury note has surged since July, reaching a 16-year high this week before slipping to 4.7% Thursday.

The 10-year yield is a benchmark rate for other borrowing costs, including mortgages, auto loans and business borrowing. The average rate on a fixed 30-year mortgage jumped to nearly 7.5% this week, the highest level in 23 years. The higher yield has, in turn, punished stocks: The S&P 500 stock index has tumbled 7.2% since late July.

Goldman Sachs has estimated that the economy’s growth in the current October-December quarter could slow to an annual rate as low as a 0.7%, sharply below a roughly 3.5% pace in the July-September quarter.

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