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Job loss erased, but danger lurks

Report wipes away earlier loss but shows private sector reductions that could prompt the Fed to cut rates again.

By Chris Isidore, CNNMoney.com senior writer

NEW YORK (CNNMoney.com) -- Job growth was back on track in September, according to a government report that showed a rebound in hiring by U.S. employers and revised away an earlier job loss that had triggered alarms about the economy.

U.S. payrolls posted a net gain of 110,000 workers in September, the Labor Department said. That's roughly in line with the forecast of a 100,000 gain by economists surveyed by Briefing.com.

FED FOCUS

The Labor Department also now estimates that August had a gain of 89,000 jobs, a big upward revision from the originally reported 4,000 job loss in August.

The weak August report had opened the door for the Federal Reserve to cut its benchmark interest rate by a half-percentage point in September, the first cut in four years, as it attempted to stave off an economic slowdown. Despite Friday's reported gain, which wiped away the first reported job loss since 2003, economists said there were numerous signs of weakness in the labor market that could keep up the pressure on the Fed to keep cutting rates.

Even with the job gains in Friday's report, the unemployment rate rose to 4.7 percent in September from the 4.6 percent reading in August. That increase was in line with what economists had forecast, and was the highest unemployment rate since August 2006.

The July payroll reading was also revised higher by 25,000 jobs more than the earlier report. That means that there are 228,000 more Americans with jobs in this latest estimate, based on the September gain and the revisions, compared to the original reading from a month ago.

Economists said most of the improvement in past payroll estimates was in government staffing levels. They say a spreading weakness in private sector hiring is likely to continue and could become a drag on the economy.

Sophia Koropeckyj of Moody's Economy.com pointed out that the six-month moving average for private sector job gains fell to 94,000 a month, the first time it's dropped below 100,000 since December 2003. And she said there's little in Friday's report or other indicators to point to a pickup in hiring by companies in the months ahead.

"The weakness persists - there's no doubt about it. We're still not out of the woods," she said. "The numbers were misleading last month, but there's other indicators of wariness."

The manufacturing sector lost 18,000 jobs in the latest report. Auto plants and auto parts makers trimmed staffs by 1,700 jobs, marking the tenth month out of the last 12 that the area saw cuts. Apparel and textile manufacturers also continued to make even deeper cuts.

Construction also saw a 14,000 reduction in jobs, as home builders slammed the brakes on new construction after the August mortgage meltdown left many buyers unable to get financing or sell their existing homes. And the problems in housing spread into service sector employment as well.

The sector of financial services that includes mortgage lenders cut 12,000 jobs, while real estate firms saw payrolls fall by nearly 2,000. Building material and garden supply stores also cut 16,700 jobs, leading to a 5,000 drop in overall retail employment.

Unemployment claims soar

Most of the big upward revision in the August payroll reading was due to a different estimate of government hiring, which is now estimated to have added 57,000 jobs in the month, rather than the originally reported loss of 28,000 jobs. And most of that revision in government jobs came in the seasonally-adjusted estimate for local school employment. Changes in laws in Texas and Florida had a number of schools opening later in August than they had in previous years.

The earlier overall payroll reading, which represented the first job loss in four years, had shaken the markets and raised concerns about the threat of a recession.

Friday's report could be key to whether the Federal Reserve cuts rates again on Oct. 31, when its next meeting concludes. While the stronger payroll number and the July and August revisions might argue against an additional rate cut, the higher unemployment rate could still leave the door open to further easing by the central bank.

Koropeckyj said her firm doesn't believe the revisions in the report reduce the likelihood of a Fed rate cut at the end of this month.

David Wyss, chief economist with Standard & Poor's, said he still expects that the Fed will cut rates at least once more, probably in October. But he said the positive jobs report greatly reduces the chance of further cuts beyond that one in the near-term. And he believes the chance that the Fed will leave rates unchanged at the October meeting has risen to about 30 percent from only about a 10 percent chance of no change before this report.

Housing dominates job cuts

"There's a lot of economic data that we'll see between now and Oct. 31," Wyss said. "I would like to see them cut rates sooner than later, but I don't know if they look at it like that. I think some [Fed members] aren't convinced they'll need to cut rates again."

One factor arguing for more cuts is that the current level of hiring isn't enough to keep the unemployment rate from continuing to climb, Wyss said.

He estimates that overall U.S. payrolls need to grow at between 125,000 to 150,000 a month just to keep up with the growth of the U.S. labor force, and keep unemployment stable.

The unemployment rate is calculated by a survey of households, rather than the employer survey used to calculate the more closely watched payroll number.

The household survey, generally viewed as less reliable by economists than the employer one, showed an even larger 463,000 increase in Americans reporting that they had jobs in September. But a 110,000 increase in those counted as unemployed resulted in the higher unemployment rate.

Still, the report also showed average hourly wages rose seven cents, or 0.4 percent, to $17.57. That's a bit more than the forecast of a 0.3 percent rise. The larger-than-expected rise in wages also could argue against further Fed rate cuts.

The increase lifted seasonally adjusted wages 4.1 percent over the last year, faster than the 2 percent rise in consumer prices over the 12 months ending in August, according to a separate Labor Department report. Top of page

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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer.

Morningstar: © 2014 Morningstar, Inc. All Rights Reserved.

Factset: FactSet Research Systems Inc. 2014. All rights reserved.

Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved.

Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor’s Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2014 and/or its affiliates.