September Jobs Report: Private Payrolls Come In Far Below Expectations

Key takeaways

• The ADP jobs report only added 89,000 jobs to the private sector, falling far under the estimates
• Bond yields retreated from 16-year highs at the news, and the major stock indexes all added gains
• More unemployment and jobs data on Friday will help determine whether the Fed needs to cut interest rates or not

According to new data from the Labor Department, private payroll growth declined significantly in September, giving stocks some breathing room and sending bond yields retreating from multi-year highs. It’s the news the markets and the Fed needed, who will be considering whether the economy is still running too hot to keep inflation in check.

With bonds marching upwards and the stock markets suffering for the last two months, it’s still uncertain which way things are headed – but the economic outlook looked significantly less positive just 24 hours ago. This latest jobs report is the shot in the arm the markets needed – and may even convince the Fed that it’s time to start dropping interest rates.

Here’s the lowdown on the latest employment data, what we can expect later this week which might upset the apple cart and why the markets are so crazy right now.

What’s the latest with private payrolls?

The ADP jobs report for September confirmed private sector payroll growth fell sharply during the month, with 89,000 jobs added. That’s a big step down from the 180,000 upwardly revised figure for August and way under the 160,000 estimate from Dow Jones economists. It’s the slowest payroll growth pace since January 2021.

Annual wage growth also stood still, reporting a 5.9% rate in September, the same as August and marking a full year of no acceleration in wage growth. “We are seeing a steepening decline in jobs this month,” said Nela Richardson, chief economist at ADP. “Additionally, we are seeing a steady decline in wages in the past 12 months.”

Services accounted for almost all of the monthly payrolls, with leisure and hospitality leading the charge with 92,000 jobs. Financial services and construction also added to the total, but other sectors lost employees: 32,000 in professional and business services, 13,000 in trade, transportation and utilities, and 12,000 in manufacturing.

As for where in the U.S. it’s happening, the West and Pacific areas saw the strongest growth in jobs added. The South was the only region to see an overall drop in jobs added.

Is there any other data to go on?

Tuesday saw the monthly Job Openings and Labor Turnover Survey (JOLTS) from the Labor Department add far more open job vacancies than expected, sending ripples throughout the markets. Job openings reached 9.61 million for August, which is up by nearly 700,000 from July and arrived well above the consensus estimate of 8.8 million.

On the other hand, actual hires were a different story. They moved up to 5.857 million, only a 35,000 climb from the previous month. The majority of the new job openings came from professional and business services, which surged by 509,000.

The government’s unemployment figures will be released at the end of the week. For August, the unemployment rate hit 3.8%, which was way up from July and marked the highest level since February 2022.

We’re also expecting the non-farm payroll data from the government on Friday. Analysts are predicting a 170,000 payroll rise in September, which would be down from the 187,000 figure in August.

All of this together will better understand the U.S. economy’s health for investors and the Fed. It’s a toss-up right now: yesterday’s surprise surge in the JOLTS data sparked a sell-off in stocks, but today’s much cooler payroll data has sent stock futures rising.

The U.S. economy is in turmoil

The relationship between bonds and stocks has always been adverse, and that couldn’t be truer right now. The bonds market has been flying upwards, with the 30-year Treasury bond creeping up over 5% and the 10-year Treasury note rising to as much as 4.884%. Neither of those percentages has been that high since 2007.

As you can imagine, the stock market hasn’t handled things so well. The Dow Jones Industrial Average index has now fallen so swiftly that it’s given up its gains for the year and is currently 0.4% down since 2023 began.

The S&P 500 fell to a four-month low on Tuesday, while the Nasdaq dropped 1.8%. Tellingly, the CBOE Volatility Index rose above 20 during intraday trading, which is a key sign of jitters in the markets and is the highest reading since May.

It doesn’t help that for the first time ever, Congress voted in favor of removing its House Speaker. Kevin McCarthy was ousted by the far-right wing of Republicans, who were furious he put through the eleventh-hour bill that stopped the government from shutting down. (You can’t make it up.) The uncertainty is creating further havoc in the markets this week.

But did today’s fresh data do anything to help stocks and bonds return to less frenetic levels?

What was the market reaction?

The latest jobs report has gone some way in relieving the pressure from the markets. After the private payrolls report, the 10-year Treasury note dropped over five basis points to 4.745%, while the 30-year Treasury bond pared back down to 4.87%.

As for stocks, they were climbing at the news. The Dow Jones Industrial Average rose 57 points, or 0.2%, while the S&P 500 made a 0.3% gain. The Nasdaq Composite climbed 0.6% higher.

Could the Fed raise interest rates again?

The crux of the issue with the markets is that nobody wants interest rates to stay at their highest levels in 22 years or, worse, increase even further. But that’s exactly the decision the Fed now has to face at its next meeting in November.

More attention than normal will be placed on Friday’s unemployment and non-farm payroll figures to try and determine which direction monetary policy is heading in. If Friday shows a better-than-expected figure, it could pressure the Fed to cut rates so the bond market returns to more normal levels.

The CME FedWatch tool currently had a pause priced in at 77% certainty compared to a 22% chance that the Fed will raise interest rates again. December is less confident, with a current 64% projection that interest rates will stay the same, with the other third favoring a quarter-point or half-point increase.

The bottom line

There’s a lot of uncertainty in the air right now, which is coming to a head after a couple of months of stock declines. As bond yields have steadily increased, fears over whether interest rates need to stay higher for longer are putting the U.S. economy towards a tipping point.

The Fed has made it clear that it will continue to follow the data when deciding monetary policy. That doesn’t necessarily mean Wall Street will get its way, though the Fed will want to avoid a recession. It’s time to get out your crystal ball for what happens next.