The U.S. economy added 150,000 jobs in October, while the unemployment rate edged up to 3.9%, offering the clearest evidence in months that the labor market is cooling even as the broader economy continues to expand at a strong pace. The Labor Department said Friday that hiring was concentrated in health care, government and social assistance, while manufacturing employment fell as strike activity weighed on auto-sector payrolls.

The headline gain was roughly half the pace reported for September before revisions, and the government also revised August and September payroll growth down by a combined 101,000 jobs. Average hourly earnings rose 0.2% in October and 4.1% from a year earlier, still above the rate that would ordinarily be associated with the Federal Reserve's 2% inflation goal but clearly below the wage gains seen earlier in the recovery.

A labor market moving closer to balance

The October report is not a weak-labor-market report. Employers are still adding workers, unemployment remains low by historical standards and the labor-force participation rate stands near its post-pandemic high. But the direction is increasingly important. The household survey showed 6.5 million people unemployed, up from 6.36 million in September, while the employment-population ratio slipped to 60.2%.

Other indicators released this week point to the same gradual rebalancing. The Bureau of Labor Statistics' latest Job Openings and Labor Turnover Survey showed 9.6 million job openings at the end of September. That remains elevated, but hiring and quits were little changed, and the quit rate has moved well below the extraordinary levels reached during the most acute phase of the post-pandemic labor shortage. A lower quit rate matters because workers generally change jobs when they believe outside opportunities and bargaining power are strong.

At the same time, productivity has improved sharply. BLS reported Thursday that nonfarm business labor productivity increased at a 4.7% annual rate in the third quarter as output rose faster than hours worked. Unit labor costs fell at a 0.8% annual rate in the quarter. Those figures are volatile, but if stronger productivity persists it could allow wages to rise without generating the same degree of inflationary pressure.

The Fed gets room to remain patient

The jobs report arrived two days after the Federal Open Market Committee left the federal funds rate at 5.25% to 5.50%. In its policy implementation decision, the Fed maintained the target range reached in July and continued the reduction of its balance sheet. Chair Jerome Powell said the central bank is proceeding carefully after raising rates by 5.25 percentage points since early 2022.

At his Wednesday press conference, Powell emphasized that officials are watching the totality of incoming data rather than committing in advance to another increase. He described the labor market as still tight but acknowledged that supply and demand conditions have moved into better balance. October's 150,000 payroll gain, higher unemployment rate and slower monthly wage growth strengthen the argument for patience, although they do not by themselves establish that inflation is defeated.

The Fed's challenge is unusual because slowing labor demand is occurring alongside strong measured economic growth. The Commerce Department estimated last week that real gross domestic product expanded at a 4.9% annual rate in the third quarter. The advance GDP estimate showed broad contributions from consumer spending, inventories, exports and government outlays. That pace is far above most estimates of the economy's sustainable long-run growth rate.

Strike effects complicate the October number

One reason to avoid overreading the 150,000 payroll increase is the United Auto Workers strike. Manufacturing employment fell by 35,000 in October, including a decline of about 33,000 jobs in motor vehicles and parts. Workers on strike are generally counted as unemployed in the establishment survey if they do not receive pay for the payroll reference period, so the dispute temporarily depressed the headline job count.

The strike effect does not erase the broader cooling trend, however. Payroll gains averaged about 204,000 over the latest three months, down substantially from the pace earlier in the expansion. Temporary-help employment, which often turns before the overall labor market, has been weak for much of the year. The October report also showed modest monthly growth in leisure and hospitality, a sector that had been a major source of post-pandemic hiring.

The combination of slower hiring and rising productivity is potentially constructive if it can continue. It suggests employers may be moving from a period defined by acute labor scarcity toward one in which staffing is easier and output per hour is improving. But the increase in unemployment bears watching, particularly because the jobless rate has risen from 3.4% in April to 3.9% in October.

A softer landing, not yet a completed one

The data available through Saturday do not show a recession. They show an economy that grew rapidly in the third quarter, a labor market that is still creating jobs and a Federal Reserve that has chosen to hold policy restrictive while it evaluates the cumulative effect of past rate increases.

That is close to the configuration policymakers have been seeking: slower employment growth without widespread layoffs, more moderate wage pressure without a collapse in household income, and improved productivity alongside falling inflation. The question is whether the rebalancing can proceed gradually or whether tighter credit and high borrowing costs will eventually push hiring below the pace needed to absorb population growth.

For now, the October employment report gives the Fed additional evidence that demand for labor is easing. It does not settle the next interest-rate decision, but it reduces the urgency for another immediate increase and places even greater weight on forthcoming inflation, wage and employment data.