September’s Payroll Puzzle: Slower Hiring Does Not Mean Easier Monetary Policy

The US September employment report, released on the evening of October 2 Beijing time, showed a gain of just 29,000 nonfarm payroll jobs.

The report sent seemingly conflicting signals. Job gains had fallen sharply, pointing to a clear slowdown in job creation, yet the unemployment rate remained at 4.2%, showing no corresponding deterioration.

The labour market was cooling, but it had not yet weakened enough to create a gap that would prompt a repricing of monetary policy.

The key question, then, was not whether employment was slowing. It was why that slowdown was still insufficient to change the outlook for interest rates.

Payroll Growth Slows as Job Creation Loses Momentum

Over the past 12 months, the US had added an average of about 45,000 jobs a month. Before the pandemic, from 2015 to 2019, the monthly average was around 190,000. The economy’s capacity to create additional jobs had clearly weakened, and the labour market was entering a period of low mobility.

But fewer new jobs do not mean that unemployment will rise immediately.

Why Have Job Gains Fallen While Unemployment Has Stayed Flat?

Nonfarm payroll growth and the unemployment rate capture different aspects of the labour market.

Payroll growth measures how quickly employers are adding jobs. The unemployment rate measures the share of the labour force that is unemployed.

Read alongside the earlier August JOLTS data, the latest adjustment was being driven less by large-scale cuts to existing jobs than by slower expansion and fewer new opportunities.

The first sign of cooling was therefore a decline in new opportunities, rather than the rapid disappearance of existing jobs.

Against a nonfarm payroll base of about 159 million jobs, a monthly gain of 29,000 was not enough to immediately change the overall unemployment rate. That rate remained at 4.2% and had stayed within a narrow range of 4.1%–4.3% since March.

At 4.2%, Unemployment Matches the Fed’s Long-Run Benchmark

More significantly, the Federal Reserve estimated the long-run equilibrium unemployment rate at 4.2%. September’s actual rate was exactly 4.2%.

That equilibrium level does not mean the labour market is strong. It means unemployment is still close to the level the Fed considers normal over the longer term.

In other words, the labour market had continued to cool, but had not yet weakened enough to create a gap that would alter the constraints on monetary policy.

Weaker Employment Does Not Automatically Mean Easier Policy

This is why a weak payroll report does not automatically change the interest-rate outlook. The Fed does not base policy on a single employment release; it weighs employment, inflation and the broader economy together.

The labour market had cooled, but inflation pressures had not yet faded. The September CPI release on October 14 would provide the next test. September’s payroll report therefore pointed to slower employment growth, rather than an employment breakdown. The slowdown still fell short of removing the constraints on policy. Put simply, weaker employment does not automatically mean easier monetary policy.