What to expect from the September jobs report

All eyes will be on the September jobs report when it is released Friday morning as investors look for clues about the labor market's health in the face of higher interest rates and sticky inflation.

The Labor Department's high-stakes September payroll report, due at 8:30 a.m. ET, is projected to show that hiring increased by 170,000 last month and that the unemployment rate ticked down to 3.7%, according to a median estimate by Refinitiv economists.

That would mark a drop from the 187,000 gain in August and the 271,000 monthly average recorded over the previous 12 months. However, it is slightly above the average pre-pandemic monthly increase.

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"While job growth likely showed resilience in September, the jobs report is poised to reveal some cooling beneath the surface with private sector hiring downshifting and wage growth slowing further," said Lydia Boussour, EY senior economist.

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Boussour said she anticipates that private-sector job growth will continue to moderate in September due to more cautious hiring and slower gains in the health care and leisure and hospitality sectors. However, she noted that a likely burst in hiring by the government – the result of teachers returning for the start of the school year – will help to elevate the headline figure.

The Federal Reserve is closely watching the report for evidence that the labor market is finally softening after months of surprisingly solid job gains as policymakers try to wrestle inflation under control. Although the consumer price index has cooled from a peak of 9.1% in June 2022, it remains well above the Fed's preferred 2% target, despite 11 interest rate hikes in the span of 16 months.

Slower job growth and further moderation in wage gains on Friday could be a welcome sign for the U.S. central bank. 

"Softer private-sector job gains, easing wage growth and the recent slowing in core inflation should provide enough comfort to the Federal Reserve to remain on pause in November, though policymakers will likely maintain a hawkish lean and reiterate the higher-for-longer policy approach," Boussour said.

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The labor market has remained historically tight over the past year, defying economists' expectations for a slowdown. Although economists say it is beginning to normalize after last year's blistering pace, it is nowhere near breaking. 

A separate report released Wednesday showed that job openings unexpectedly jumped to 9.6 million at the end of August, reversing three straight months of declines. Before the COVID-19 pandemic began in early 2020, the highest on record was 7.6 million. There are still roughly 1.5 jobs per unemployed American. 

The data, combined with historically low jobless claims, point to a labor market that remains resilient despite growing headwinds. Still, there are some mixed messages, including a report Wednesday that indicated private-sector job growth fell to the slowest pace since early 2021.

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"The September employment report is expected to be consistent with that not-too-hot, not-too cold-theme," said Mark Hamrick, senior economist analyst at Bankrate. "However, among the things missing from a would-be Goldilocks scenario is a return to low inflation. Uncertainty remains a theme associated with the economic outlook as well."