US economy adds 165,000 jobs in October as unemployment falls to 4.1%, lifting Fed rate hike bets

The US economy added 165,000 jobs in October, more than double what economists had forecast, and the unemployment rate edged down to 4.1%, the US Bureau of Labor Statistics said on Friday.

The figures, released at 8.30am Friday US Eastern time (9.30pm AWST), also showed hiring in August and September was stronger than first thought, and wages grew faster than expected. Economists had forecast about 65,000 new jobs and an unemployment rate steady at 4.2%.

The surprise strength pushed up US Treasury yields and the US dollar, and lifted market bets that the Federal Reserve will raise interest rates again in December. The Australian dollar slid against the greenback.

On Wall Street, which is trying to recover from Thursday’s AI-led sell-off that VNN reported earlier on Friday, technology shares rose while the Dow Jones Industrial Average slipped. At about 11.45pm AWST, the S&P 500 was up about 0.7%, the Nasdaq Composite up about 1.3% and the Dow down about 0.1%. US markets close at 5am AWST on Saturday.

What do the October numbers show?

Total non-farm payrolls rose by 165,000 in October, the bureau said. It also revised its earlier estimates up by a combined 84,000 jobs: August’s gain is now 186,000, up from 133,000, and September’s is 60,000, up from the 29,000 first reported.

Even with October’s jump, the bureau said payroll growth had averaged 48,000 jobs a month over the previous 12 months.

The unemployment rate fell to 4.1% from 4.2% in September, a move the bureau described as little change. It said the rate has stayed between 4.1% and 4.3% since March. About 7.1 million Americans were unemployed.

The fall came even as more people joined the workforce. The labour force grew by about 421,000 people in October, and the participation rate, the share of people aged 16 and over who are working or looking for work, rose to 61.9% from 61.8%.

Not every measure was strong. The number of people working part-time because their hours had been cut or they could not find full-time work rose by 339,000 to 4.8 million. About 2 million people had been unemployed for 27 weeks or more, little changed on the month.

Average hourly earnings for private-sector workers rose 14 US cents, or 0.4%, to US$38.00 in October, and were up 3.1% on a year earlier. Economists had expected annual wage growth of about 2.9%.

Which industries hired, and which cut jobs?

Professional and business services led the gains, adding 70,000 jobs. Health care added about 41,600, transportation and warehousing about 24,800 and manufacturing 19,000. Social assistance added about 13,500.

Leisure and hospitality shed about 13,000 jobs, including about 7,200 at restaurants and bars. Wholesale trade lost about 9,100 and construction about 3,000. Government employment rose by about 6,000 overall, with state governments adding jobs while federal employment edged lower.

James Knightley, chief international economist at ING, said manufacturing had now added about 86,000 jobs over five months after three years of decline, a turnaround he linked to factors including US energy and production costs, technology investment and tariffs.

Why does the report matter?

The monthly jobs report is one of the most closely watched pieces of US economic data because it feeds into the Federal Reserve’s interest rate decisions, which in turn move borrowing costs, currencies and share markets around the world.

October’s figures land at a sensitive time. The Fed raised its benchmark rate by a quarter of a percentage point in September, to a range of 3.75% to 4%, and held it there on 28 October. Two of the 12 voting members of its rate-setting committee, Governor Lisa Cook and Cleveland Fed President Beth Hammack, dissented in favour of another increase.

In its October statement, the Fed said inflation remained elevated and that economic activity was expanding at a strong pace. US consumer prices rose 3.7% in the year to September, the Bureau of Labor Statistics said last month, with energy prices up 20.4%.

That means annual wage growth of 3.1% is still running below the latest inflation rate. Brian Jacobsen, chief economic strategist at Annex Wealth Management, said real wages had declined as inflation outpaced pay growth.

The report also came three days after the US midterm elections on 3 November, in which Democrats won control of both chambers of Congress. Concern among investors that a Democrat-controlled Congress could slow the construction of AI data centres was a factor in Thursday’s sell-off, when the Nasdaq fell 5.5%, the S&P 500 4.4% and the Dow 3.4%.

How did markets react?

Bond markets moved first. Shortly after the release, the yield on the two-year US Treasury note, which is sensitive to interest rate expectations, rose about five basis points to about 4.52%, and the 10-year yield rose about three basis points to about 4.87%, before both eased slightly. A basis point is one hundredth of a percentage point.

The US dollar index, which measures the greenback against a basket of major currencies, rose about 0.7% to about 102.2. Gold fell about 1% to around US$4,050 an ounce.

Wall Street opened mixed at 10.30pm AWST (9.30am US Eastern time). Five minutes into trading, the Dow was down 0.9%, the S&P 500 up 0.4% and the Nasdaq up more than 1.4%, as chipmakers that were hit hardest on Thursday bounced. Nvidia, which fell 9% on Thursday, was trading higher.

By about 11.45pm AWST, the S&P 500 was up about 0.7% at about 7,405 points, the Nasdaq up about 1.3% at about 24,641 and the Dow down about 0.1% at about 51,468.

A stronger economy is a mixed blessing for share investors, because it raises the chance of higher interest rates. Tim Holland, chief investment officer at Orion, said the report should make a Fed rate hike more likely and push up bond yields.

What might the Federal Reserve do next?

The Fed’s next decision is due on 9 December US time, at the end of a two-day meeting. After the jobs report, pricing in US interest rate futures implied roughly a three-in-four chance of a quarter-point increase at that meeting, according to CME Group’s FedWatch tool, up from about two-in-three earlier on Friday.

Several economists said the report strengthened the case for a rise. ING’s James Knightley said “we fully expect the Fed to deliver at that meeting”, adding that he expected a long pause after that. Peter Cardillo, chief market economist at Spartan Capital Securities, said the data confirmed the Fed had no choice but to raise rates in December. Christopher Rupkey, chief economist at FWDBONDS, said “interest rates are going higher, much higher”.

Others were more cautious. Joe Saluzzi, co-head of equity trading at Themis Trading, said that after the recent market turmoil the Fed might not raise rates on the strength of this report alone. Ariane Curtis of Capital Economics said she doubted the recent fall in share prices had been enough to rule out a December increase.

Fed Chair Kevin Warsh gave no guidance on December after the October meeting. He said then that conditions on the employment side of the Fed’s mandate were quite positive, but that inflation had run above the Fed’s objective for close to six years.

Before the December decision, the Fed will see October inflation figures, due on 10 November US time, and the November jobs report, due on 4 December.

What does it mean for Australians?

The most immediate effect is on the Australian dollar. At 11.39pm AWST it was buying about 68.8 US cents, down about 0.8% on the day, after dipping below 68.6 US cents earlier. It had already been under pressure during the Australian session as share markets fell around the world, and was at 68.93 US cents when the ASX closed.

A stronger US dollar and the prospect of higher US interest rates tend to weigh on the Australian dollar. A weaker dollar can make imported goods, overseas travel and fuel, which is priced in US dollars, more expensive for Australians, while helping exporters who are paid in US dollars.

Australian shares will not trade again until Monday. The S&P/ASX 200 closed 0.5% lower at 9,020 points on Friday afternoon, before the jobs data was released, after Thursday’s sell-off on Wall Street. Overnight ASX 200 futures were broadly flat late on Friday night, Perth time.

At home, the Reserve Bank of Australia raised the cash rate by a quarter of a percentage point to 4.85% on Tuesday 3 November, its fifth increase this year and the highest level since 2008. The decision was split, with six members of the Monetary Policy Board voting for the increase and three preferring to hold at 4.6%.

In its statement, the RBA said growth in Australia’s major trading partners had been stronger than expected, helped by AI-related investment, and that inflation was expected to stay above 3% over the coming year. Unlike in the US, it said Australia’s unemployment rate had risen and was expected to rise further than it had forecast in August.

The RBA dropped earlier wording about raising rates further if needed, saying instead that it would continue to do what it considers necessary to return inflation to target. Governor Michele Bullock has said the board is keeping its options open.

The RBA’s next meeting is on 7 and 8 December, the same week as the Fed’s. Any further fall in the Australian dollar would add to the cost of imports, one of the inflation pressures the RBA watches. The Australian Bureau of Statistics is due to release Australia’s own October jobs figures later this month.

VNN will update this story as more is confirmed.