Job creation surged in September; unemployment steady at 3.8%

Today’s jobs report affirmed other recent government data related to the labor market — it’s still strong — too much for the Fed to be comfortable. The unemployment rate held steady at 3.8% in September, belying the robustness of much of the underlying data.

The surprising strength of the report came via the unexpected increase in nonfarm payrolls, which rose 336,000 for the month, compared to a consensus expectation of less than half that. Upward revisions to July and August tacked another 119,000 onto the three-month tally for jobs created. The report confirmed that job creation accelerated sharply in the third quarter, suggestive of a second wind for a jobs market that had been showing some signs of vulnerability in the face of higher interest rates.

The surprising upside in job creation is one part of the story; the other is the breadth of those job gains across the economy. The service sector led the way, contributing 234,000 new jobs for the month, but gains were also solid in manufacturing and construction. Hiring by state and local governmental entities contributed another 67,000 new jobs.

The strength of the report helps to clear the path for the Fed to take another quarter point in the near term. Policymakers had already been setting the stage for a bit more tightening in both their comments and the most recently updated Fed forecasts. The fact that recent job creation data has not only faltered but provided evidence of resurgent demand will only reinforce the Fed’s bias to do more.

The jobs report is another “good-news-is-bad-news” data point for investors. As evidence of renewed economic momentum mounts despite historically aggressive rate hikes, the potential for Fed overtightening the economy into a recession also grows. In recent weeks, soft landing hopes haven’t dissipated, but they have dimmed.

There’s a growing risk to the economy presented by a convergence of factors: higher interest rates, higher energy costs, labor disputes (most notably headlined by the UAW strike), and the resumption of student loan payments are all headwinds to growth. There are also questions about how long consumers can continue to spend as household cash stockpiles are chewed down and credit card balances outstanding surge past pre-COVID-19 levels. None of these factors alone appears sufficient to sink the economy; collectively, the risk to continued growth is more notable.

What does this mean for markets? A heightened probability of another Fed hike, renewed upward pressure on long-term rates, and further volatility in equity markets as investors digest what it all means.

The bottom line? A strong labor market may be good news for workers and those looking for a job, but it increases the probability of further Fed tightening until something breaks. Soft landing hopes may have surged in recent months, but the economy isn’t out of the woods yet.