Slowing Job Growth Good News for Those Concerned About Inflation

Roy Maurer By Roy Maurer October 7, 2022
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U.S. employers added 263,000 new jobs in September, down from 315,000 new jobs created in August, marking the 21st straight month of job growth, but coming in under economists' forecasts, according to the latest employment report from the U.S. Bureau of Labor Statistics (BLS).

It's the lowest monthly increase in jobs since April 2021, and that's good news for inflation watchers, as a slowdown in hiring as well as muted wage growth should soften the pressure on decades-high inflation roiling the economy. Deceleration is what the Federal Reserve is looking for as a sign of progress being made in its efforts to tamp down inflation.

On the other hand, the unemployment rate dropped to 3.5 percent, matching a 50-year-low, despite the Federal Reserve trying to slow the economy. Wages rose 5 percent in September year-over-year, a slower pace than August's 5.2 percent annual rate. Average hourly earnings increased 0.3 percent month-over-month.

"Today's jobs report showed some gradual softening month over month, which is good for employers—there is some continuing release of pressure in this very tight labor market," said Becky Frankiewicz, president and chief commercial officer at ManpowerGroup.

"America's help wanted signs are still up and employers are still hiring, a good sign of continued confidence in fourth quarter demand for their firms' products and services, even in the face of a slowing economy," said Richard Wahlquist, president and chief executive officer at the American Staffing Association in Alexandria, Va. "And yet, the Fed wants to drive down inflation rates by driving up unemployment rates which will disproportionately hurt vulnerable workers and hurt overall economic growth."

Eileen Sweeney, head of Adecco, North America, added that "the Federal Reserve's efforts to combat inflation and cool down the red-hot job market by increasing interest rates will certainly continue to have an impact on hiring…but we're still in a market that favors job seekers for the time being."

Payroll growth is decelerating, but the pace of jobs growth still exceeds the 2019 pre-pandemic level averaging around 200,000 new jobs per month. Notably, the private sector produced 288,000 new jobs in September, which would have been higher than economists' forecasts, but 25,000 government job losses brough the net number down.

"The job market is slowing modestly but still moving forward at a healthy clip," said Daniel Zhao, Glassdoor senior economist.

Nick Bunker, the economic research director for North America at the Indeed Hiring Lab, said that the current three-month average in payroll gains is more than twice as fast as the average pace in 2019 when the unemployment rate was at a similar level. "This current average pace of 372,000 is much faster than the number needed to hold the unemployment rate constant, which is closer to 70,000 to 100,000 jobs a month," he said.

"Service industries led job gains in September with significant growth in leisure and hospitality [+83,000], health care [+60,000], and professional and business services [+46,000]," Zhao said. "Retail [-1,100] and transportation and warehousing [-7,900] did see modest seasonally adjusted job losses even as holiday hiring starts."

Julia Pollak, chief economist at ZipRecruiter, observed that while job gains remained broad-based, the economy is starting to become a tale of two job markets. "In several industries, jobs are still roaring back—such as in health care, which fully recovered to its pre-pandemic staffing level; restaurants and bars; and arts, entertainment, and recreation. In a growing set of industries that are disproportionately affected by high interest rates, low stock prices, and a strong dollar, employers are starting to make some cuts—such as in finance and insurance, residential construction, car dealerships, and advertising and related services."

The losses to public-sector employment, which is still 309,000 employees down than before the pandemic, are worrying, she added. "Public schools continue struggle to compete for workers in a supply-constrained environment. And the public sector has lagged the private sector when it comes to wage growth."

Frankiewicz said that "Looking ahead, holiday hiring is the weathervane, and we are seeing early signs of what we call a 'hybrid holiday' for seasonal work, with an increased need for traditional in-store retail jobs as well as delivering goods and remote roles in customer service."

Sweeney added that seasonal hiring has gotten off to a good start, particularly for warehouse and customer care roles. "There may be softening, however, particularly within the manufacturing industry, which may also impact supplies and inventory for businesses and consumers this holiday season."

Unemployment Drops

Alongside the unemployment rate declining, the share of prime-age workers—those ages 25 to 54—also fell in September. "The stall out in employment growth was driven more by a slowdown in unemployed workers getting jobs than a rise in employed workers entering unemployment," Bunker said. "And the widely feared spike in layoffs has yet to arrive."

Layoffs have ticked up slightly in recent months but remain at historically low levels. Weekly jobless claims have hovered for most of 2022 close to their pre-pandemic 2019 average of 218,000.

"Although the percentage of unemployed people has returned to its July 2022 and February 2020 level, it does so with a larger population and smaller labor force participation," said Giacomo Santangelo, economist at Monster. "While 3.5 percent of the labor market is unemployed, our return to that percentage comes with 83,000 more unemployed people than in July 2022."

The drop in unemployment in September was accompanied by a slight decrease in labor force participation, Zhao said. The labor-force participation rate, which measures the percentage of working-age adults who are working or looking for work, dipped to 62.3 percent in September from 62.4 percent in August.

"With close to 90 million working aged women and men not in the labor force, the private sector and government must make getting people off the sidelines a top priority," Wahlquist said.

A 'Soft Landing' Is Still Possible

Experts believe a "soft landing," the goal of the Federal Reserve to stop an economy from overheating and experiencing high inflation, without causing a severe downturn, is still in the cards.

"A soft landing is not off the table if the job market continues to slow gracefully, keeping job gains chugging along and moderating wage gains while suppressing any rise in unemployment," Zhao said.

Pollak added that September's solid job gains and cooling wage growth are what the Fed wants to see, but improvement in the labor supply is still a hurdle. 

"Constrained labor supply is still a drag on employment growth, as well as a driver of wage growth and inflation," she said. "There were 57,000 fewer people in the labor force in September, and the overall participation rate ticked downwards. Many observers had been expecting that women would return in large numbers with the reopening of schools this school year, but instead the number of women in the labor force declined. One reason for weaker participation may be the decline in employment in child day care services."

Santangelo said that both slowing job openings and increasing unemployment numbers may signal that the Federal Reserve's aggressive inflation-fighting policy is starting to work at slowing the economy down.

"While the Fed is expected to continue its monetary contraction, the fact that the labor market numbers are not worse may embolden them to be more aggressive," he said.

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