Unemployment Falls to 50-Year Low
October 7, 2022
US businesses continued to add jobs at a solid pace last month and the unemployment rate unexpectedly fell, illustrating a strong labor market that puts the Federal Reserve on track for another 75 basis point interest-rate hike. In response to the report, the equity market fell and bond yields rose as investors were hoping to see proof that the job market is tightening.
Nonfarm payrolls increased by 263,000 in September after a 315,000 gain in August, and the unemployment rate dropped back to 3.5%. The labor force participation rate, which is the share of the population that is working or looking for work, contracted from 62.4% to 62.3%. The jobs report also showed average hourly earnings were up 0.3% from August and up 5% from a year earlier. This represents a slight deceleration from the prior month but wage growth is still elevated.
Job growth was strong across many categories, particularly leisure and hospitality, as restaurants and bars continue to play catch up. Despite a weakening housing market, construction also added solid jobs. Moreover, strong hiring in professional and technical services and health care continues to drive job gains. However, the weakening demand for goods led to a decline in transportation and warehousing as well as retail. Bloomberg economists pointed out that the report would have been even stronger if not for state and local education, which was recorded as a decrease due to seasonal adjustments. Despite a drop in the unemployment figure, the pace of hiring is slowing and layoffs can be seen in sectors that significantly increased their workforce during the pandemic.
The participation rate falling to 62.3% is a disappointing aspect of the report given that investors were hoping to get some help from the supply side of the economy. Recall that there is still a large gap to the pre-pandemic participation rate of 63.4%, however, based on the demographics of the US population, Bloomberg economists believe aging demographics can explain over half the gap. Unfortunately, these economists think the likelihood of adding more participants to the labor market is limited. Without new labor force participants, the Fed may have to be even more aggressive in order to bring the labor market into balance.
Bloomberg economists think the September jobs report strengthens the case for yet another 75 basis point hike at the November FOMC and we agree. In fact, Bloomberg’s World Interest Rate Probability function shows that markets are fully pricing in a 75 basis point hike in November and a terminal rate that lines up with the Fed’s median dot between 4.50% and 4.75%.
Alex Dietz
Senior Research Analyst
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