US economy adds 175K jobs in April, much weaker than expected

U.S. job growth slowed notably in April while the unemployment rate unexpectedly rose, a sign that high interest rates and stubborn inflation are starting to weigh on the labor market.

Employers added 175,000 jobs in April, the Labor Department said in its monthly payroll report released Friday, missing the 243,000 gain forecast by LSEG economists. It marked the worst month for job creation since October. The unemployment rate, meanwhile, inched higher to 3.9% against expectations that it would hold steady at 3.8%.

Wage growth was also more subdued last month, with average hourly earnings — a key measure of inflation — rising 0.2%, less than expected. On an annual basis, wages increased 3.9% in April.

"The spring flowers may have been blooming in April, but the labor market showed modest signs of wilting," said Jason Pride, chief of investment strategy and research at Glenmede.

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The surprisingly weak report paints a picture of a job market that is beginning to sputter as the result of the Federal Reserve's aggressive interest-rate hike campaign, and boosts the odds of rate cuts sooner rather than later. Wall Street welcomed the news, with all three major stock indices soaring in premarket trading Friday morning.

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"Following a steady stream of sticky inflation data in recent months, today’s much-weaker-than-expected jobs report had to bring smiles to the faces of the Fed board," said Chris Larkin, managing director, trading and investing at E*Trade. "It may not put a June rate cut back on the table, but unless it turns out to be an anomaly, it will increase the odds that the Fed will be able to get in at least one cut this year." 

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Fed policymakers voted Wednesday to hold interest rates steady at the highest level since 2001 and signaled they will remain in wait-and-see mode on rate reductions after a string of hot inflation reports at the beginning of the year. 

Chair Jerome Powell ruled out the likelihood of additional rate hikes this year, and signaled the Fed is ready to act should there be an "unexpected weakening" in the labor market. 

"It would have to be meaningful and get our attention and lead us to think that the labor market was really significantly weakening for us to want to react to it," he added. "A couple of tenths [percentage points] in the unemployment rate would probably not do that."

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Health care continued to lead the way in job creation, onboarding 56,200 new workers in April. Other sectors showing notable growth included social assistance (30,800), transportation and warehousing (21,800) and construction (9,000).

The report also showed modest revisions to job gains earlier this year. Gains for February were revised down by a total of 34,000 jobs to 236,000, the government said, while March's gain was slightly higher at 315,000 jobs.

Until Friday, the labor market had remained historically tight over the past year, defying economists' expectations for a slowdown. Economists say it is beginning to cool after last year's blistering pace, but is still nowhere near breaking

"The labor market remains the key pillar of resilience for the U.S. economy, but the April jobs report confirms that a broad cooldown in labor market conditions is underway," said Lydia Boussour, EY senior economist. "We foresee softer labor market conditions with cooler hiring, localized layoffs, and a continued moderation in wage growth."