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A pickup of 119,000 jobs in September was the biggest gain in five months. While that quieted recession fears, the previous signs of a hiring slowdown are still present, and will likely continue. September’s gains were narrowly concentrated in health care, leisure and hospitality, and state and local government. Over half of industries are cutting jobs on net. The gains in construction and teaching in September are not likely to last, since these tend to be volatile. The gain in leisure and hospitality benefited from a likely one-time seasonal adjustment to the official data. The unemployment rate has risen for three months in a row, and now stands at 4.4%. While that is still low when compared with historical levels, the rate is likely to continue moving upwards for a while, given the elevated number of corporations announcing layoffs through WARN notices (Worker Adjustment and Retraining) recently. When released on December 16, October data are likely to show a net job loss, given that 100,000 or so federal workers who took buyouts earlier in the year will be removed from the federal job rolls for the first time. The most instructive labor market picture is likely to be reflected in the November data, which will be released at the same time.
The unemployment rate is likely to continue to edge up through the first half of next year, peaking at 4.7% before retreating to 4.5% by year-end 2026. Wage growth was reported in September to be 3.8% at an annual pace, and is expected to slow to 3.5% by the end of the year. Wage growth tends to lag other labor market indicators.
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Consumer and business uncertainty about the economy will continue to delay hiring plans and should slow future pay gains. Employers often defer hiring when consumers are concerned about losing their jobs, or when businesses don’t know whether there will be a positive return to investing in additional workers. Prior to the tariffs, we expected monthly job growth of about 150,000 new positions to continue. Now, job growth could disappear almost entirely, if enough employers decide to hold off on hiring while they sort out the effects of the new tariffs on both their businesses and the economy as a whole.
The payroll employment release is important to the Federal Reserve for two reasons: First, one of the Fed’s two mandates is to support employment. Second, employment is a more reliable indicator of recession than the initial GDP estimates. The Fed needs accurate employment numbers to tell it when to either step on the gas or hit the brakes by cutting or raising interest rates. While the strong September employment report may keep the Fed on hold for now, the likely reappearance of weakness in the labor market should lead to several Fed rate cuts next year.
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