The U.S. economy created jobs at a much slower-than-expected pace in September, a pessimistic sign about the state of the economy though the total was held back substantially by a sharp drop in government employment.

Nonfarm payrolls rose by just 194,000 in the month, compared with the Dow Jones estimate of 500,000, the Labor Department reported Friday. The unemployment rate fell to 4.8%, better than the expectation for 5.1% and the lowest since February 2020.

The headline number was hurt by a 123,000 decline in government payrolls, while private payrolls increased by 317,000.

The drop in the jobless rate came as the labor force participation rate edged lower, meaning more people who were sidelined during the coronavirus pandemic have returned to the workforce. A more encompassing number that also includes so-called discouraged workers and those holding part-time jobs for economic reasons declined to 8.5%, also a pandemic-era low.

“This is quite a deflating report,” said Nick Bunker, economic research director at job placement site Indeed. “This year has been one of false dawns for the labor market. Demand for workers is strong and millions of people want to return to work, but employment growth has yet to find its footing.”

Nevertheless, markets reacted little to the news, with Dow futures around flat for the morning and government bond yields mixed as investors digested what was a mixed bag of a report.

Despite the weak jobs total, wages increased sharply. The monthly gain of 0.6% pushed the year-over-year rise to 4.6% as companies use wage increases to combat the persistent labor shortage. The available workforce declined by 183,000 in September and is 3.1 million shy of where it was in February 2020, just before the pandemic was declared.

“Labor shortages are continuing to put severe upward pressure on wages … at a time when the return of low-wage leisure and hospitality workers should be depressing the average,” wrote Andrew Hunter, senior U.S. economist at Capital Economics.

Leisure and hospitality again led job creation, adding 74,000 positions, as the unemployment rate for the sector plunged to 7.7% from 9.1%. Professional and business services contributed 60,000 while retail increased by 56,000.

Job gains were spread across a variety of other sectors: Transportation and warehousing (47,000), information (32,000), social assistance (30,000), manufacturing (26,000), construction (22,000) and wholesale trade (17,000).

Local government education jobs fell by 144,000, which may have been due to seasonal adjustments in the numbers, according to Gus Faucher, chief economist at PNC.

The survey week of Sept. 12 came just as Covid cases were peaking in the U.S. The delta variant spread since has cooled, with cases most recently dropping below an average of 100,000 a day.

Unemployment for Blacks fell to 7.9% from 8.8%, due largely to a drop to 66% from 66.7% in the labor force participation rate for males.

There was some good news in Friday’s report from previous months.

July’s already-strong gains were revised higher by 38,000 to 1.0913 million, while August’s big letdown also was revised up, to 366,000 from the initially reported 235,000.

The employment-to-population level increased to 58.7%, its highest since March 2020.

The report comes at a critical time for the economy, with recent data showing solid consumer spending despite rising prices, growth in the manufacturing and services sector, and surging housing costs.

Federal Reserve officials are watching the jobs numbers closely. The central bank recently has indicated it’s ready to start pulling back on some of the extraordinary help it has provided during the pandemic crisis, primarily because inflation has met and exceeded the Fed’s 2% goal.

However, officials have said they see the jobs market still well short of full employment, a prerequisite for interest rate hikes. Market pricing currently indicates the first rate increase likely will come in November 2022.

“After looking like almost a done deal, today’s jobs number has thrown expectations for tapering into disarray. The Fed doesn’t seem to need much to convince it that tapering should begin imminently, but at just 194,000, jobs numbers are suggesting that the labor market is further from hitting the substantial progress goal than they expected,” said Seema Shah, chief strategist at Principal Global Investors.

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Companies shook off worries over the Covid delta variant and hired at a faster than expected pace in September, according to a report Wednesday from payroll processing firm ADP.

Private jobs rose by 568,000 for the month, better than the Dow Jones estimate from economists of 425,000 and ahead of the downwardly revised 340,000 reading in August. The initial August report showed growth of 374,000.

The report comes amid concerns about how fast hiring would grow considering ongoing fears over the delta spread and signs that the brisk economic growth of 2021 was beginning to slow heading into autumn, particularly due to supply chain bottlenecks that have driven inflation sharply higher.

“The labor market recovery continues to make progress despite a marked slowdown from the 748,000-job pace in the second quarter,” ADP Chief Economist Nela Richardson said.

Stock market futures were off their lows for the morning following the release, while government bond yields moved higher.

The critical leisure and hospitality sector led job creation with 226,000 hires. The sector was hit hardest during the pandemic and has struggled the most to regain traction as it is the most sensitive to the economic reopening. Establishments are struggling with labor shortages despite nearly 2 million job openings.

Though the industry, which includes bars, restaurants, hotels and the like, has about 800,000 more workers employed than a year ago, its unemployment rate remains at 9.1%, compared to the national rate of 5.2%, according to Labor Department data through August.

Much of that hiring appears to have come through hotels and larger chains, as companies with 500 and more employees led job creation with 390,000. Businesses with fewer than 50 workers added just 63,000 jobs, while medium-sized firms contributed 115,000.

The faster pace of job creation comes with Covid cases on the wane nationally, despite some localized hot spots. Total U.S. cases averaged 97,909 on a seven-day rolling bases through Monday, compared to 160,284 a month ago, according to the CDC.

As usual, services dominated, with 466,000 new hires, helped by education and health services with 66,000, professional and business services with 61,000, and 54,000 from trade, transportation and utilities.

However, goods producers posted a solid 102,000 gain. Manufacturing contributed 49,000 and construction added 46,000.

The ADP report serves as a precursor for the Labor Department’s more widely watched nonfarm payrolls release Friday. The Dow Jones estimate from economists is for 500,000 new jobs after August’s letdown of just 235,000. However, the two reports can differ substantially. Through August, the ADP count of private payrolls had undershot the government’s tally by an average 37,000 per month.

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A sharp jump in mortgage interest rates over the past few weeks is taking its toll on mortgage demand. Total application volume fell nearly 7% last week compared with the previous week, according to the Mortgage Bankers Association’s seasonally adjusted index. 

The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($548,250 or less) increased to 3.14% from 3.10%, with points rising to 0.35 from 0.34 (including the origination fee) for loans with a 20% down payment. That is the highest level since July. 

Refinance demand, which is especially sensitive to weekly interest rate movements, fell to the lowest level in three months, down 10% last week compared with the previous week. Volume was 16% lower than the same week one year ago. 

“Higher rates are reducing borrowers’ incentive to refinance, as declines were seen across all loan types,” said Joel Kan, MBA’s associate vice president of economic and industry forecasting. 

Mortgage applications to purchase a home declined 2% for the week and were 13% lower than the same week one year ago. It was driven by a drop in conventional loan applications. Government loans, which are mostly used by lower-income borrowers, saw a 1% increase in demand. 

“But that was still not enough to bring down the average loan balance of $410,000. With home-price appreciation and sales prices remaining very elevated, applications for higher balance, conventional loans still dominate the mix of activity,” added Kan. 

Rates fell back a little bit to start this week, but then moved higher again Tuesday. The bond market, which dictates daily rate movement, reacted to economic data.

“After an important report on the services sector came out stronger than expected, bonds continued to deteriorate,” said Matthew Graham, chief operating officer at Mortgage News Daily. “When bonds lose enough ground in the middle of a trading day, mortgage lenders occasionally make mid-day adjustments to their rate offerings.”

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The current spate of inflation won’t last and ultimately will fall below the Federal Reserve’s target, Chicago Fed President Charles Evans said Tuesday.

While inflation by some measures is running at a 30-year high, Evans told CNBC the supply chain bottlenecks and other issues will subside and price pressures will fade.

“I’m comfortable in thinking that these are elevated prices, that they will be coming down as supply bottlenecks are addressed,” he told CNBC’s Steve Liesman during a “Squawk Box” interview. “I think it could be longer than we were expecting, absolutely, there’s no doubt about it. But I think the continuing increase in these prices is unlikely.”

Inflation has been at 3.6% year over year in the past couple of months, the highest since the early 1990s, according to the Fed’s preferred gauge. Other measures, such as the consumer price index, have inflation running even hotter.

Evans acknowledged that the trend is putting pressure on the economy.

“That definitely is a challenge for households and businesses. I mean, it cuts into income, wages. So that’s a problem. We’re definitely monitoring that,” he said. “It’s really not a monetary policy issue, it’s an infrastructure supply issue at the moment. So I think inflation will be coming down, and I think once it’s come down, we’re still going to be in a low interest rate … world.”

Nevertheless, the Fed broadly has indicated that it has met the inflation part of its mandate, with the level running well above the 2% goal. Consequently, the central bank is expected to begin slowly pulling back on the unprecedented support it has provided during the pandemic, starting with a tapering of monthly asset purchases.

However, interest rate increases are not expected to being until at least the end of 2022, according to current Federal Open Market Committee projections. Market pricing sees the first hike coming either in November or December of next year, according to the CME’s FedWatch tool.

While Evans said he is on board with the tapering, he said the Fed soon will be facing the familiar change of keeping inflation elevated to healthy levels, and likely will have to keep rates low.

“It’s just putting challenges on getting monetary policy to produce sustainable inflation at and above 2% so that we can average 2% over time,” he said.

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Tourists are lined up for taking photos by the Charging Bull Statue in the financial district of New York, on August 16, 2021.
Tayfun Coskun | Anadolu Agency | Getty Images

Overall U.S. household wealth has never been this high, thanks largely to gains in the stock market that are a bigger share of that prosperity than ever before.

In fact, equity holdings now make up about half of the $109.2 trillion of financial assets that households owned through the second quarter of 2021, according to Bank of America. Other than stocks, financial assets also include bonds, cash, certificates of deposit and bank deposits.

The equity share of assets is a 70-year high, Bank of America said.

Overall household net worth jumped to $141.7 trillion in the second quarter, the result of a $3.5 trillion increase in the value of corporate equities as stocks continued their climb during the period. Including nonprofits, the equity share of net worth is 41.5%, according to the Federal Reserve.

While the news has been good for individuals who own stocks, there’s an ever-present specter of risk-taking that raises worries should the market’s fortunes change. Wall Street saw the longest bull market in history end early in 2020, then quickly resume and power to records through the back part of 2021.

“Money goes where money grows,” said Mitchell Goldberg, president of ClientFirst Strategy. “As the stocks value keep going up, they’re continuing to put money there. They’re going to keep putting money into it until there’s a better place to put it.”

The S&P 500 has risen just over 15% in 2021, on the backs of friendly fiscal and monetary policy and robust growth in corporate earnings.

A significant part of the policy backdrop has been record-low interest rates and aggressive money pumping from the Federal Reserve, along with massive fiscal stimulus from Congress.

With the Fed making the first noises about tightening and Washington politicians battling over more spending, Goldberg wonders what will happen if the market-friendly policies start to turn around.

“People’s wealth are up on two things, stocks and houses, and they’re both more or less tied to interest rates,” he said. “There have been a lot of policies that have pushed the value of these assets up. What happens when the policies go away? That’s the $64 trillion question.”

Fed officials have indicated they likely will begin reducing the pace of their monthly asset purchases by the end of the year. Still, interest rate rises seem a ways off, with Philadelphia Fed President Patrick Harker affirming Friday that the central bank is unlikely to start hiking until late 2022 or early 2023.

Bank of America’s chief investment strategist, Michael Hartnett, noted Friday that clients “have sold stocks (modestly) past 5 weeks.” The bank’s indicator of sentiment has gone from almost bullish enough to trigger a contrarian “sell” signal to a bit more cautious.

Still, investors have poured about $34.5 billion into U.S. equity mutual funds and ETFs alone over the past 12 months, according to Morningstar, indicating there’s still plenty of appetite for stocks.

Goldberg said he’s cautious in that kind of environment, and is advising his older clients to trim their holdings somewhat and start building up cash in what could be a more challenging environment.

“Everyone who is invested today is investing the same way, based on falling interest rates, globalization, great supply-demand chains and low inflation,” he said. “Those are huge macroeconomic cycles, and it looks like we’re seeing the reverse now. While we go through those changes, it’s going to create a lot of volatility, a lot of peril and a lot of opportunity.”

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Inflation ran at a fresh 30-year high in August as supply chain disruptions and extraordinarily high demand fueled ongoing price pressures, the Commerce Department reported Friday.

The core personal consumption expenditures price index, which excludes food and energy costs and is the Federal Reserve’s preferred measure of inflation, increased 0.3% for the month and was up 3.6% from a year ago. The monthly gain was slightly higher than the 0.2% Dow Jones estimate and the annual forecast of 3.5%.

That’s the highest since May 1991 and reflective of inflationary pressures that Fed Chairman Jerome Powell said earlier this week he finds “frustrating.”

On a headline basis, PCE prices rose 0.4% for the month and 4.3% year over year, the highest since January 1991. That reflected a 24.9% increase in energy prices and a 2.8% rise in food.

Goods prices rose by 5.5% while services increased by 3.6%.

The rise in inflation came as personal income increased 0.2% for the month, in line with estimates but indicative that real income is falling as inflation rises. Spending accelerated 0.8%, slightly above the 0.7% forecast.

Personal savings totaled $1.71 trillion, running at a 9.4% rate and a decrease from 10.1% in July. The savings rate peaked at 33.8% in April 2020 in the early days of the pandemic as the government rushed out payments to individuals and businesses were shut down to combat the Covid spread.

A separate report Friday morning showed that manufacturing continued to expand.

The ISM Manufacturing index for September registered a 61.1 reading, representing the percentage of companies seeing expansion. Anything above 50 represents growth; the Dow Jones estimate was 59.5.

The survey also showed prices rising, with 81.2% of respondents reporting increases against 79.4% in August.

Order backlogs decreased to 64.8, a drop of 3.4 points from a month ago, but companies overall were still reporting delays.

“Supply chain concerns are growing beyond electronics and chips into most other commodities. Lead times are extending, shipping lanes are slowing, and we will not see an end to this in 2021,” said one respondent in the electrical equipment, appliances and components industry.

Also, consumer sentiment improved, according to the University of Michigan’s index, which rose to 72.8 in September compared to 70.8 in August and a 71 estimate.

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Janet Yellen, U.S. Treasury secretary, speaks during a House Financial Services Committee hearing in Washington, D.C., U.S., on Thursday, Sept. 30, 2021.
Sarah Silbiger | Bloomberg | Getty Images

With a potential default looming for the U.S. in October, Treasury Secretary Janet Yellen said Thursday she would just as soon see the power over debt limits taken away from Congress.

A bill introduced in May would repeal the national debt ceiling, and Yellen said “yes, I would” when asked during a House hearing if she backs the effort.

She noted Congress makes the decisions on taxes and spending, and should provide the ability to pay those obligations.

“If to finance those spending and tax decisions, it’s necessary to issue additional debt, I believe it’s very disruptive to put the president and myself, the Treasury secretary, in a situation where we might be unable to pay the bills that result from those past decisions,” she said in response to a question from Rep. Sean Casten, D-Ill.

The remarks were made during a hearing before the House Financial Services Committee on the Treasury and the Federal Reserve’s economic response to the Covid pandemic.

Casten said he was asking Yellen about the concept of removing the debt ceiling and not the particular bill, introduced by Rep. Bill Foster, also an Illinois Democrat, along with a trio of Democratic senators.

Yellen this week warned that extraordinary measures her department is using to keep funding the government’s operations expire Oct. 18.

Earlier in the hearing, she said the consequences would be dire if Congress fails to raise the spending limit.

“I think it would be catastrophic for the economy and for individual families,” she said.

The U.S. currently is $28.4 trillion in debt, nearly $700 billion of which has been incurred since President Joe Biden took office and chose Yellen to head the Treasury. The budget deficit through the first 10 months of the fiscal year stood at $2.71 trillion.

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Real estate agents arrive at a brokers tour showing a house for sale in San Rafael, California.
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Higher interest rates took some recent wind out of the sails in the mortgage market.

After gains the previous week, total mortgage application volume fell 1.1% last week from the previous week, according to the Mortgage Bankers Association’s seasonally adjusted index.

The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances of up to $548,250 increased to 3.10% from 3.03%. Points, including origination fee, rose to 0.34 from 0.30 for loans with a 20% down payment.

“Increased optimism about the strength of the economy pushed Treasury yields higher following last week’s FOMC meeting. Mortgage rates in response rose across all loan types, with the benchmark 30-year fixed rate reaching its highest level since early July 2021,” said Joel Kan, MBA’s associate vice president of economic and industry forecasting.

Applications to refinance a home loan, which are highly sensitive to weekly rate movements, decreased 1% from the previous week and were essentially flat from a year ago. The increase in interest rates occurred late in the week and continued into this week, suggesting the negative effect on refinance demand will be more severe in next week’s report.

Mortgage applications to purchase a home fell 1% last week and were 12% lower than a year ago. The weakness in purchase demand is less about rising interest rates, which are still historically low, and more about sky-high home prices.

Prices nationally increased 19.7% year over year in July, up from an 18.7% annual increase in June, according to the latest S&P CoreLogic Case-Shiller Home Price Index. That’s another record increase.

“With home-price appreciation continuing to run hot, increasing more than 19 percent annually in July, applications for larger loan amounts continue to outpace lower-balance loans. The average loan size for a purchase application reached $410,000, its highest level since May 2021,” Kan said.

Price gains are expected to soon start cooling slightly, simply because sales have dropped and more supply is coming on the market. Higher mortgage rates will also take some of the fuel out of rising prices, since potential buyers would face higher monthly payments.

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Sen. Elizabeth Warren charged Tuesday that Federal Reserve Chairman Jerome Powell has led an effort to weaken the nation’s banking system, and she vowed to oppose his renomination.

In remarks made during a hearing before the Senate Banking Committee, the Massachusetts Democrat cited several instances where she said the Powell Fed has watered down post-financial crisis bank regulations.

Sen. Elizabeth Warren (D-MA) questions Treasury Secretary Janet Yellen and Federal Reserve Chairman Powell during a Senate Banking, Housing and Urban Affairs Committee hearing on the CARES Act, at the Hart Senate Office Building in Washington, DC, U.S., September 28, 2021.
Kevin Dietsch | Reuters

“Your record gives me grave concerns. Over and over, you have acted to make our banking system less safe, and that makes you a dangerous man to head up the Fed, and it’s why I will oppose your renomination,” Warren said.

Powell did not respond to Warren’s comment that she will oppose him.

Warren said deregulatory moves could cause another calamity the likes of which the U.S. saw during the 2008-09 breakdown of Wall Street institutions.

She called Powell “lucky” that banks thus far have been able to avoid major problems, citing the Archegos Capital Management collapse and the banking industry’s collective need for Fed assistance during the coronavirus pandemic as dangers to the system exacerbated by deregulatory moves.

“So far you’ve been lucky. But the 2008 crash shows what happens when the luck runs out,” she said. “The seeds of the 2008 crash were planted years in advance by major regulators like the Federal Reserve that refused to rein in big banks. I came to Washington after the 2008 crash to make sure nothing like that would ever happen again.”

Powell has served since 2018 and his term expires in February. Wall Street widely expects President Joe Biden to renominate Powell, though Warren and other more liberal senators are likely to provide some resistance.

Chair of the Federal Reserve Jerome Powell appears before a Senate Banking, Housing and Urban Affairs Committee hearing on the CARES Act, at the Hart Senate Office Building on September 28, 2021 in Washington, DC.
Matt McClain | AFP | Getty Images

Even if he does seek to give Powell another term, Biden will have a chance to remake the Fed.

Randal Quarles, the current vice chair in charge of supervision, will see his term expire in October, and current Fed Governor Lael Brainard, who favors a stronger regulatory hand, has been given frequent mention as a potential replacement.

Vice Chairman Richard Clarida will see his time on the Federal Reserve Board of Governors expire in January, and there remains another vacancy on the board.

Sen. Robert Menendez, D-N.J., grilled Powell during the hearing on the lack of diversity at the central bank. Biden will face pressure to provide a diverse set of nominees for the Fed vacancies.

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Treasury Secretary Janet Yellen and Federal Reserve Chairman Jerome Powell speak Tuesday to the Senate Committee on Banking, Housing and Urban Affairs on efforts their respective institutions have taken to combat the pandemic’s impact on the economy.

In prepared remarks for the congressionally mandated testimony, Powell noted the importance of the joint aid, saying the Fed’s lending programs specifically “have served as a backstop to key credit markets and helped to restore the flow of credit from private lenders through normal channels.”

Separately, Yellen said she is “optimistic about the medium-term trajectory of our economy,” though she, like Powell, noted that the Covid delta variant has slowed the recovery.

Read more:
Fed Chair Powell to warn Congress that inflation pressures could last longer than expected
Fed officials say they see a pullback in their economic support even with inflation cooling
Yellen urges Congress to raise debt limit, warns Pelosi about extraordinary measures running out soon

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