US employers continue to hire rapidly even in the face of rate hikes

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U.S. employers continued to hire vigorously in October, adding 261,000 jobs, a sign that as Election Day approaches, the economy remains a picture of solid job growth and painful inflation.

Friday’s government report showed hiring was brisk across all industries last month, although the overall gain was down from 315,000 in September. The unemployment rate fell from a five-decade low of 3.5% to a still healthy rate of 3.7%.

The government also said the average hourly wage rose 4.7% from a year ago, a weaker year-on-year gain than in September. Still, last month’s 12-month average wage increase remained high enough to fuel inflation.

A strong labor market is compounding the challenges the Federal Reserve faces as it raises interest rates at the fastest rate since the 1980s in an attempt to bring inflation down from a nearly 40-year high . Steady hiring, solid wage growth and low unemployment have benefited workers. But they also contributed to the price increase.

October’s jobs figures were the last major economic report before Election Day, with voters focusing heavily on the state of the economy. Chronic inflation is hammering the budgets of many households and has risen to the top of voters’ minds in the midterm legislative elections that end on Tuesday. Republican candidates have attacked Democrats over inflation in their drive to regain control of Congress.

Over the past three months, job gains have averaged 289,000, down from the blistering monthly rate of 539,000 a year ago. All the jobs created by employers since the end of the recession have bolstered consumers’ ability to continue spending, even in the face of high inflation. A labor shortage in many sectors of the economy has also forced businesses to pay more to attract and retain workers.

President Joe Biden and congressional Democrats have pointed to the vigorous resurgence in hiring as evidence that their policies have helped get Americans back to work faster than the nation has managed to after previous downturns. But that message was overtaken in midterm political campaigns by the crushing surge in inflation, which embittered many Americans about the economy under Democratic leadership in Congress and the White House.

The October jobs report showed job gains were broad-based last month. Health care added 71,000 people, with hospitals and medical practices continuing to recruit after losing many workers at the height of the pandemic. Manufacturing added 32,000. A category that includes engineers, accountants and lawyers added 39,000.

Still, signs are emerging that some corners of the economy have begun to reel under the weight of rising prices and much higher borrowing costs brought about by the Fed’s aggressive interest rate hikes. Especially in sectors like housing and technology, hiring has declined. Many tech companies, such as ride-sharing company Lyft and payment company Stripe, have announced plans to lay off workers. Amazon announced Thursday that it would suspend hiring.

Across the economy, however, the pace of layoffs remains exceptionally low. And companies in travel, catering, manufacturing and healthcare are still hiring steadily. Southwest Airlines told investors last week it was on track to hire 10,000 employees this year, including 1,200 pilots. Laboratory Corporation of America said it expects significant hiring.

To Wednesday press conference, Fed Chairman Jerome Powell noted that the strength of the labor market is fueling inflationary pressures as companies continue to raise wages. In September, average salaries rose more than 6% from 12 months earlier, according to the Federal Reserve Bank of Atlanta. It was the fastest pace in 40 years, although it still lagged inflation.

Wages tend to follow rising inflation as workers seek to follow price increases. These wage increases, in turn, can keep inflation high if companies pass on at least some of their higher labor costs to their customers in the form of higher prices.

Powell spoke after the Fed announced a fourth straight three-quarter point hike in its benchmark rate. This is the latest in a series of unusually large increases that have made mortgages and other consumer and business loans increasingly expensive and increased the risk of recession.

Fed policymakers opened the door to the possibility of a smaller rate hike at their next meeting in December. But Powell also said that to get inflation under control, the Fed would likely have to raise rates high enough to weaken the labor market. This could mean that hiring will slow down in the coming months or even that many employers will cut jobs and increase the unemployment rate.

So far this year, the Fed has raised its key short-term rate six times – from near zero in early March to a range of 3.75% to 4%, the highest level in 14 years.

Housing absorbed the worst damage from rising borrowing costs. Fed rate hikes sent average long-term mortgage rates reaching around 7%, the highest level in two decades. As a result, home sales have plummeted and home prices, once soaring, have begun to slow.

For now, the economy is still growing. It rose at an annual rate of 2.6% in the July-September quarter after contracting in the first six months of the year. But much of the growth in the last quarter was due to a surge in US exports. By contrast, consumers – the main driver of the economy – only modestly increased their spending above the rate of inflation.

With inflation still painfully high and the Fed making borrowing increasingly expensive for consumers and businesses, most economists are expecting a recession early next year.

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