All eyes will be on the October 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 October payroll report, due at 8:30 a.m. ET, is projected to show that hiring increased by 180,000 last month and that the unemployment rate held at 3.8%, according to a median estimate by Refinitiv economists.
That would mark a drop from the 336,000 gain in September and the 271,000 monthly average recorded over the previous 12 months. However, it is slightly above the average pre-pandemic monthly increase.
"The October jobs report will likely show a marked softening in labor market conditions with private sector hiring moderating and wage growth cooling further," said Lydia Boussour, EY senior economist.
Boussour said she anticipates that services employment will continue to moderate in October due to more cautious hiring in both the professional and business services and the leisure and hospitality sectors. Goods employment is also expected to post the first decline since March thanks to the UAW strike against the Big Three Detroit automakers.
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 considerably in recent months, 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, which held interest rates steady for the second straight month on Wednesday.
Average hourly earnings – a key measure of inflation – are expected to increase 0.3% for the month and climb 4% from the same time one year ago.
"See if wage growth starts to moderate," said Jeffrey Roach, chief economist at LPL Financial. "Markets could get choppy if wages continue to grow faster than inflation."
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 climbed to 9.6 million at the end of September, the second straight month of gains. 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.