The jobs report is likely to show another month of modest but steady gains in hiring

WASHINGTON— The U.S. labor market is still reliably adding jobs every month, enough to give Americans the confidence and paychecks to keep spending and sustaining the economy. Still, the pace of hiring has lost momentum in recent months, suggesting employers have become more cautious.

September probably brought more of the same. The Labor Department is expected to report Friday that employers added a decent but hardly spectacular 140,000 jobs last month, roughly in line with the 142,000 gain in August, according to forecasters surveyed by data firm FactSet.

“We will see modest job gains, not huge, but enough to drive the economy,” said Brian Bethune, an economist at Boston College.

The resilience of the economy is a relief. Economists had expected the Federal Reserve’s aggressive campaign to curb inflation – raising interest rates 11 times in 2022 and 2023 – to trigger a recession. That wasn’t the case. The economy continued to grow despite ever-increasing borrowing costs for consumers and businesses.

Last month, the Fed began cutting interest rates, in part to stimulate the slowing labor market. And as Bethune noted, the once-unlikely prospect of a “soft landing” — in which high interest rates help fight inflation without triggering a recession — “is already assured.”

The economy weighs heavily on voters as the Nov. 5 presidential election approaches. Many Americans are unimpressed with the resilience of the job market and are still frustrated by high prices, which are still on average 19% higher than February 2021 levels. At that time, inflation began to rise as the economy recovered from the pandemic recession with unexpected speed and strength, leading to severe shortages of goods and labor.

Across the economy, most indicators look solid. The U.S. economy, the world’s largest, grew strongly at an annual rate of 3% from April to June, driven by consumer spending and business investment. A forecast tool from the Federal Reserve Bank of Atlanta points to slower but still healthy annual growth of 2.5% in the just-ended July-September quarter.

On Thursday, the Institute for Supply Management, an association of purchasing managers, reported that America’s professional services companies grew for the third straight month in September, and at a faster-than-expected pace. The service sector of the economy is closely watched because it accounts for more than 70% of U.S. jobs.

Last month, the country’s households increased their retail spending. And even though hiring has slowed, Americans enjoy exceptional job security. The share of layoffs in employment is almost at a record low. The number of people applying for unemployment benefits also remains at historically low levels.

Companies generally appear unwilling to lay off workers, although they are also reluctant to increase their payrolls. This unusual dynamic could be because many employers were caught flat-footed and understaffed as the economy recovered from the pandemic recession.

Employers added an average of just 116,000 new jobs per month from June to August, including a dismal 89,000 in July. Those were the weakest three months of hiring since mid-2020. Hiring fell from a record average of 604,000 per month in 2021 at the end of the COVID recession to 377,000 in 2022.

Posted job vacancies have also fallen steadily, to 8 million in August, after peaking at 12.2 million in March 2022.

Employees have noticed the cooler environment for job seekers. Far fewer feel confident enough to leave their job to seek a better position. The Labor Department reported this week that the number of Americans quitting their jobs fell to its lowest level since August 2020, when the economy was still reeling from the coronavirus crisis.

Job hopping is also no longer as lucrative as it used to be. Last month, those who changed jobs earned 6.6% more than the previous year – a 1.9 percentage point increase over the average pay gain of 4.7% for those who kept their jobs. According to Liv Wang, senior data scientist at ADP Research, the job-hopping premium used to be much higher – peaking at 8.8 percentage points in April 2022.

Two and a half years of high interest rates appear to have put a strain on the labor market. But relief could be coming.

The Fed cut its key interest rate by a hefty half percentage point last month – the first and biggest rate cut since the 2020 recession. The central bank said it was encouraged by progress in fighting inflation. Consumer prices rose 2.5% in August from a year earlier, barely above the Fed’s 2% inflation target and falling dramatically from an annual peak of 9.1% in June 2022.

Friday’s jobs report could bring more good news on inflation. Diane Swonk, chief economist at tax and consulting firm KPMG, said she expects average hourly wages rose 0.2% last month, compared with a 0.4% increase in August. That would mean, she says, an increase of 3.7% compared to the previous year. That’s roughly in line with the 3.5% that many economists consider consistent with the Fed’s inflation target. Such a decline would reduce pressure on employers to pass on the cost of higher wages through price increases, thereby stimulating inflation.

The Fed’s focus shifted to supporting the labor market as hiring slowed this summer and unemployment rose, although it remained relatively low. The central bank has signaled that it expects to cut its key interest rate twice more this year – probably by modest quarter points – and four more times in 2025.

The expectation of lower borrowing costs could encourage employers to increase the pace of hiring.

“You see light at the end of the tunnel of this monetary tightening that has been going on for several years,” Bethune said.