Economy added jobs amid high inflation, rising rates

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US job growth slowed for the second month in September as employers added a still solid 263k jobs, suggesting high inflation, rising interest rates and a slowing economy are finally weighing on a resilient job market.

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

Economists polled by Bloomberg estimated that 250,000 jobs were created last month. While the actual gain beat that forecast, it was still the smallest advance since April 2021.

The job market has been remarkably buoyant this year, posting average monthly gains of more than 400,000 despite economic challenges and the Federal Reserve’s campaign to stem rising costs by making borrowing more expensive for consumers and businesses. Labor shortages have prompted many employers to continue hiring and avoid layoffs lest they be caught flat-footed when activity picks up again.

“Job growth has slowed significantly throughout 2022 as economic growth has slowed but remains well above its pre-pandemic pace,” said Gus Faucher, chief economist at PNC Financial Services Group.

What does the new job report mean?

The Fed is examining monthly changes in employment to gauge whether inflation is cooling off enough for officials to roll back the most aggressive rate hikes since the early 1980s. These increases have hurt the stock market and fueled fears of a recession.

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In a sign that labor shortages may persist, the proportion of adults working or looking for work has fallen to 62.3% over the past month, well below the 63.4% pre-pandemic level. The labor force participation rate was generally up, rising sharply in August as workers returned to a sizzling job market after caring for children or sitting idle amid COVID-19 fears.

Is the labor market still strong?

September’s slump suggests that finding workers could remain a challenge and push wage increases higher. That would likely further fuel inflation, which is just below a 40-year high.

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

The renewed decline in participation, along with falling unemployment and solid job gains, will likely help persuade the Fed to approve another sharp three-quarter-point 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 falling?

After the report was released, stock losses increased. The Dow Jones Industrial Average slipped 2% as of 12:53 p.m. ET. The S&P 500 fell 2.6% and the Nasdaq fell 3.5%. US Treasury yields jumped, with the 2-year yield nearly 4.3% and the 10-year 3.9%.

Which industry is currently hiring?

Leisure and hospitality, which includes restaurants and bars, the sector hardest hit by the pandemic, led the job gains by 83,000 although it is still 1.1 million below its pre-COVID level. Healthcare added 60,000 and professional and business services added 46,000.

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Manufacturing added 22,000 jobs as US consumers continued to buy goods even as a strong dollar hurt exports. And construction added 19,000, with businesses still desperate for workers due to long-standing labor shortages despite the downturn in the housing market.

But the public sector has shed 25,000 jobs, largely because fewer school staff have returned to work in the last month than before the pandemic, causing employment to fall after seasonal adjustments.

Is there a recession in 2023?

Many economists now believe that the Fed’s rate hikes will plunge the nation into recession next year, and uncertainty is beginning to weigh on hiring numbers. Wage increases slowed to about 300,000 in August from more than 500,000 in July.

During that period, job vacancies – a gauge of future hiring – fell sharply from a record-breaking 11.2 million to a still robust 10.1 million. With 1.7 vacancies for every unemployed person, workers still have bargaining power. But that’s less than two vacancies per unemployed person in the previous month.

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

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

Will there still be a shortage of workers in 2022?

At the same time, most industries are still plagued by labor shortages, and many companies have chosen not to lay off employees, even as the outlook dims.

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“Companies still don’t want to lose the talent — especially talent with tech skills — that they’ve worked so hard to acquire,” said Nicola Hancock, general manager of the Americas region at AMS, a talent acquisition and consulting firm. “Although the US economy is shrinking, we are still experiencing the most painful skills shortages we have seen in our history.”

The result: an unusual split in a cooling job market, with some employers becoming more cautious while others continue to hire or at least avoid downsizing.

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

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

The 32-year-old isn’t worried about finding a new job, although he fears he may face a pay cut after receiving steady pay rises during his four-year tenure at the centre. “There are jobs there,” he says. “I’m confident I’ll find something.”

What are the labor market prospects?

Many economists expect the job market to lose momentum at a faster rate now that the nation has regained all 22 million jobs lost in the health crisis and high inflation and interest rates are beginning to dampen consumer and corporate spending . According to Moody’s Analytics, monthly gains are expected to fall to about 100,000 by the end of the year.

“Job growth should slow more rapidly as employers cut hiring amid a slowing economy and falling corporate profits,” economist Nancy Vanden Houten wrote in a note to clients.

Featuring: Elisabeth Buchwald

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