The U.S. labor market remains strong despite slowing job growth in September.

The U.S. labor market lost some momentum in September, but remained strong, as high inflation and rising interest rates weighed on the economy.

Job growth slowed, with employers adding a seasonally adjusted 263,000 jobs in September, the Labor Department said Friday. The increase, while still robust, was less than August’s increase of 315,000 and the monthly average gain of more than 400,000 during the first half of the year.

The unemployment rate fell to 3.5% last month from 3.7% in August, matching a half-century low that was last reached in July. The number of people in the labor force fell in September after increasing the prior month.

Stocks fell and Treasury yields climbed on concern that the relative strength of the jobs market would keep the Federal Reserve on track to approve another large interest-rate increase at its meeting next month. Officials are trying to lift borrowing costs high enough to slow hiring, spending and investment to reduce fourdecade-high inflation.

“We are seeing labor demand cool,” said Sarah House, senior economist at Wells Fargo. “But we have a long way to go towards restoring balance.

between supply and demand for labor.”

Annual gains in average hourly earnings eased to 5% in September, still rapid but below August’s 5.2% pace and the slowest rate since December 2021.

September’s slowing of wage gains wasn’t enough to help the Fed meet its inflation goal, economists said. “That’s still too strong for an inflation target of 2%, but it’s a step in the right direction,” Ms. House said. Earlier in the week, the Labor Department said job openings in August posted their largest decline since the early months of the Covid-19 pandemic, while layoffs rose slightly.

Leisure, hospitality and healthcare companies hired the most workers last month, the Labor Department said. Retailers and warehousing and transportation businesses cut jobs.

The labor-force participation rate, or the share of adults holding or seeking jobs, has remained stubbornly below where it stood before the pandemic, contributing to labor shortages that continue to pose challenges for the economy. That is keeping upward pressure on wages and inflation as employers compete for fewer available workers.

The participation rate eased slightly to a seasonally adjusted 62.3% in September from 62.4% the prior month, the Labor Department said. Prime-age women—those age 25-54—led the decline in September following a jump the prior month, continuing an uneven pattern for female participation since the pandemic hit. Younger workers, age 16 to 19, also left the labor force in September, compared with the prior month.

Lack of child care is a significant reason workers are staying out of the labor market.

There were 4.8 million people who cited caring for children as a reason for not having a job, according to the Census Bureau’s Household Pulse Survey released this week. An additional 1.7 million said they weren’t working because they were caring for an elderly person.

Lagging participation could complicate the Fed’s inflation fight because the labor market needs more workers competing for jobs to help cool wage growth.

“The only thing that the Fed might have wanted in this report that it didn’t get was higher labor-force participation,” said Daniel Zhao, senior economist at Glassdoor.

Many firms slowing hiring or laying off workers are in industries that are highly sensitive to interest-rate increases, such as technology and real estate. Some companies that saw a rise in demand earlier in the pandemic are also cutting back as consumer preferences shifted from goods to services.

Peloton Interactive Inc. said Thursday that it plans to cut about 500 jobs, roughly 12% of its remaining workforce, in the exercise-equipment company’s fourth round of layoffs this year. Other companies, from Facebook owner Meta Platforms Inc. to Snap Inc، and Stanley Black & Decker Inc., are cutting jobs, while others including Inc. and Alphabet Inc.’s Google have said they would freeze or pull back on hiring.

At other businesses, demand for workers hasn’t eased. Laura Lee Blake, president and chief executive of the Asian American Hotel Owners Association, said that filling positions is a top concern among the 20,000 owners in the group.

Difficulty in hiring has led some hotel owners to implement self-check-in kiosks, but some roles, such as cleaning rooms, don’t have an automated solution.

“One member had their parents come out of retirement to help cover some of the shifts simply because they didn’t have enough staff,” Ms. Blake said، “I have not heard any discussions about layoffs. It’s more about how they’re so desperate to find people.”

While the labor market remains tight, some workers continue using their leverage to win wage gains or better benefits ahead of a possible jobs slowdown.

Cassandra Wilander, a marketing professional in Chicago, said she changed jobs twice this year and experienced a shift in how hiring managers handled the process.

The first time, in January, she was able to find a job quickly and ask for a significant pay increase. The second time, this summer, the process took longer and she had to negotiate more for her salary after the initial offer came in lower than she had hoped.

Ms. Wilander, 36, had been frustrated with strict pandemic protocols at a former employer and in January took a new job at a small legal-marketing firm. The switch came with a $25,000 pay increase, But when that firm lost its access to downtown office space, Ms. Wilander decided she would try to hop again and left her job over the summer to look for new work.

She took a job in September as a communications specialist at a commercial real-estate company after the first real stretch of unemployment in her career: Employers took significantly longer to get back to her compared with her earlier search, she said. Still, the search paid off with a job she was happy to take.

“I know my worth, I know the value I bring,” Ms. Wilander said. “I’m a little unique in that respect, I don’t know that other people would be willing to hop like that.”

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