US job growth blows past expectations, unemployment rate falls to 4.1%

By Lucia Mutikani

WASHINGTON (Reuters) -U.S. job gains increased by the most in six months in September and the unemployment rate fell to 4.1%, pointing to a resilient economy that likely does not need the Federal Reserve to deliver large interest rate cuts for the rest of this year.

In addition to the better-than expected increase in nonfarm payrolls reported by the Labor Department on Friday, wages rose at a solid pace last month. The closely watched employment report also showed the economy added 72,000 more jobs in July and August than previously estimated.

The report followed on the heels of annual benchmark revisions to national accounts data last week that showed the economy is in much better shape than previously estimated, with upgrades to growth, income, savings and corporate profits.

This improved economic backdrop was acknowledged by Fed Chair Jerome Powell this week when he pushed back against investors' expectations for another half-percentage-point rate cut in November, saying "this is not a (policy-setting) committee that feels like it is in a hurry to cut rates quickly."

"This solid report increases the odds that the economy will continue to grow above trend in the next quarter," said Jeffrey Roach, chief economist at LPL Financial. "Our base case is the Fed will cut by a quarter point at the next few meetings."

Nonfarm payrolls increased by 254,000 jobs last month, the most since March, the Labor Department's Bureau of Labor Statistics said. Economists polled by Reuters had forecast payrolls would rise by 140,000 positions after advancing by a previously reported 142,000 in August.

The initial payrolls count for August has typically been revised higher over the past decade. Estimates for September's job gain ranged from 70,000 to 220,000. Job growth is now above the monthly average gain of 203,000 in the past 12 months.

But labor market could experience some brief turbulence after Hurricane Helene devastated large swathes of the U.S. Southeast last week. Tens of thousands of machinists at Boeing also went on strike in September, with ripple effects on the aerospace company's suppliers.

The strike, if it persists beyond next week, could dent the nonfarm payrolls data for October, which will be released just days before the Nov. 5 U.S. presidential election.

The surge in employment last month was led by hiring at restaurants and bars, which increased by 69,000 jobs. The healthcare sector added 45,000 positions, driven by home healthcare services, hospitals as well as nursing and residential care facilities.

Government employment increased by 31,000 jobs, lifted mostly by state and local government hiring. Social assistance payrolls rose by 27,000 jobs. Construction employment advanced by 25,000 positions, reflecting solid gains in nonresidential specialty trade contractor jobs.

LOW LAYOFFS

The rise in payrolls in most sectors likely reflects lower layoffs. Hiring has tapered off as demand ebbed following the 525 basis points worth of rate hikes pushed through by the Fed in 2022 and 2023.

Average hourly earnings rose 0.4% last month after gaining 0.5% in August. Wages increased 4.0% on a year-on-year basis after climbing 3.9% in August. Strong wage growth argues against the U.S. central bank delivering another half-percentage-point rate cut at its Nov. 6-7 meeting.

The dollar rallied to a seven-week high against a basket of currencies. Major U.S. stock indices were trading sharply higher, while U.S. Treasury yields rose.

Financial markets boosted the odds of a quarter-percentage-point rate reduction in November to 91% from 71.5% before the report, CME Group's FedWatch tool showed. The odds of a 50-basis-point cut were slashed to 9.0% from around 28.5% earlier.

The pricing action could still change as October's employment report will be released before the Fed's next meeting. The U.S. central bank cut its policy rate by 50 basis points last month to the 4.75%-5.00% range, its first rate reduction since 2020.

The drop in the unemployment rate from 4.2% in August reflected an increase of 430,000 jobs in household employment, which more than absorbed the 150,000 people who entered the labor force last month. The jobless rate has jumped from 3.4% in April 2023, in part boosted by those aged 16 to 24 and a rise in temporary layoffs during the annual automobile plant shutdowns in July.

(Reporting by Lucia Mutikani; editing by Chizu Nomiyama and Paul Simao)