US employers hired far more workers than expected in October and the unemployment rate slipped, a combination that pushed traders to price in a greater chance the Federal Reserve raises interest rates again in December.
Nonfarm payrolls rose by 165,000 last month, the Bureau of Labor Statistics said Friday, nearly triple the 65,000 gain economists had forecast in a Reuters poll and well above the prior 12-month average of 48,000. Estimates had ranged widely, from 35,000 to 125,000. The jobless rate fell to 4.1% from 4.2% in September, defying expectations that it would hold steady.
Revisions added to the picture of a firmer labor market. August payroll growth was lifted to 186,000 from 133,000, and September's increase was revised up to 60,000 from 29,000. Together the two months added 84,000 more jobs than previously reported, lifting the three-month average to 137,000 a month.
Wages also came in hotter than expected. Average hourly earnings climbed 14 cents, or 0.4%, from September to $38.00, and were up 3.1% from a year earlier, versus forecasts of 0.3% and 2.9% respectively.
Note: Prior figures reflect the initially reported September levels; the payroll revision to 60,000 was published with the October report.
Professional and business services and health care each added far more than their prior 12-month averages of 15,000 and 31,000, respectively. Transportation and warehousing has added 104,000 jobs since February, and manufacturing 101,000 since December 2025. The agency said employment was little changed in mining, construction, wholesale trade, retail trade, information, financial activities, social assistance, leisure and hospitality, other services, and government.
Markets reacted quickly. Futures tied to the S&P 500 gave up earlier gains after the release, while Dow e-minis were down 493 points, or 0.96%, and Nasdaq 100 e-minis were up 367.5 points, or 1.37% in early trading. Treasury yields extended their advance, with the 10-year note up 6.3 basis points at 4.898%. Spot gold fell 1.15% to $4,041.89 an ounce, while spot silver edged up 0.33% to $51.95. The dollar rose as high as 158.58 yen after the data before easing back to about 158.3 yen, roughly where it traded before the release, according to OANDA Lab.
The split equity reaction followed a brutal session on Thursday, when the AI trade unraveled. A $2.3 trillion selloff pushed the Nasdaq into correction territory and lifted the VIX volatility index 70% to 28. Chip stocks rebounded early Friday after their worst drop since 2020, helping Nasdaq futures even as the jobs data pushed rate expectations higher.
The report lands at a delicate moment for monetary policy. The Fed left its benchmark rate in a 3.75%-4.00% range at its meeting last week, having raised rates in September for the first time since 2023 to counter inflation linked to the conflict in the Middle East. Economists had broadly expected one more increase at the December meeting, and Friday's data reinforced that view. CME FedWatch put the probability of a quarter-point increase at the Dec. 8-9 meeting at 76.8%, up from 72.8% before the release. A December increase would widen the policy gap with the Bank of Japan, which kept its short-term rate at 1.25% at its meeting last week.
Attention now turns to next Tuesday's October consumer price report, which could sharpen the case for how far the central bank goes into 2027. Rate futures had already been pricing additional increases in December and next year before the payrolls release.
Beneath the headline beat, the labor market remains unusual. Layoffs are historically low and job openings rose by 333,000 in September to 7.52 million, yet hiring has been sluggish for nearly two years. Economists describe the backdrop as "low-hire, low-fire," with employers reluctant to expand headcount while also avoiding cuts.
Other details were less uniformly strong. Labor force participation rose to 61.9% from 61.8%, so the decline in unemployment was not the result of people dropping out of the workforce. The broader U-6 measure, which includes discouraged workers and people working part time because they cannot find full-time jobs, rose to 7.9% from 7.6%. The number of people employed part time for economic reasons increased by 339,000 to 4.8 million, and the average workweek held at 34.4 hours.
A shrinking workforce explains part of the puzzle. The pace of job creation needed to keep unemployment steady has fallen to roughly 40,000 a month from about 150,000 in 2024, reflecting an immigration crackdown and retirements. Economists surveyed said the economy needs at least 40,000 jobs a month to keep up with growth in the working-age population.
"Long-term, we're not going to need as many jobs added to the economy to have stable employment because we have fewer people who are available to work," said Nicole Bachaud, labor economist at jobs site ZipRecruiter, pointing to an aging workforce, decades of low birth rates and reduced immigration.
Even so, job growth continues to lag overall economic output. Gross domestic product expanded at a 3.4% annualized rate in the third quarter, powered by consumer spending and heavy business investment in artificial intelligence. Employers, economists say, likely overhired after the pandemic and are now weighing staffing needs as they fold AI into operations, while uncertainty from the US-Israel war with Iran and elevated energy costs add to caution.
Heather Long, chief economist at Navy Federal Credit Union, said before the release that the labor market illustrates why households feel squeezed. "Americans delivered a clear verdict in the midterm elections that the current economy is squeezing people financially and making it hard to get by, let alone get ahead," she said. "The labor market is a good example of why people are frustrated."
For investors, the report complicates the outlook. A resilient labor market gives the Fed room to keep its focus on inflation rather than growth, which supports the case for higher rates and pressures rate-sensitive assets such as gold and long-duration bonds. Equity markets face a split reaction: cyclical and financial shares may benefit from evidence of economic strength, while technology stocks remain preoccupied with the sustainability of AI spending after this week's AI-led selloff.
The wage numbers will be watched closely. Annual pay growth of 3.1% remains above the pace of consumer price increases seen earlier in the year, but September's annual inflation rate of 3.7% has been outpacing wage gains, eroding household purchasing power. If pay growth keeps accelerating, the Fed may find it harder to argue that the labor market poses no inflation risk.