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WRAPUP 1-Slower U.S. job growth anticipated in September; labor market still tight

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Nonfarm payrolls forecast increasing 250,000 in September

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Unemployment rate seen unchanged at 3.7%

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Average hourly earnings expected to rise 0.3%

By Lucia Mutikani

WASHINGTON, Oct 7 (Reuters) - U.S. job growth likely slowed in September as rapidly rising interest rates leave businesses more cautious about the economic outlook, but overall labor market conditions remain tight, providing the Federal Reserve with cover to maintain its aggressive monetary policy tightening campaign for a while.

The Labor Department's closely watched employment report on Friday is also expected to show the jobless rate unchanged at 3.7% last month, with strong annual wage gains.

The labor market has largely been resilient to the higher borrowing costs and tighter financial conditions, with economists saying businesses are reluctant to layoff workers following difficulties hiring in the past year as the COVID-19 pandemic forced some people out of the workforce, partly due to prolonged illness caused by the virus.

"There is obviously no inclination for firms to fire people, but they're starting to get a little bit more nervous about the economic outlook," said James Knightley, chief international economist at ING in New York.

Nonfarm payrolls likely increased by 250,000 jobs last month after rising 315,000 in August. While that would be the weakest reading since December 2020, it would be way above the monthly average of 167,000 in the 2010s. Estimates for payrolls growth ranged from as low as 127,000 to as high as 375,000.

"That's a performance that we feel would not change the Fed's assessment of a labor market that is still too tight," said Sam Bullard, a senior economist at Wells Fargo in Charlotte, North Carolina. "And that is not conducive to getting inflation back down to the Fed's 2% target."

The U.S. central bank has hiked its policy rate from near-zero at the beginning of this year to the current range of 3.00% to 3.25%, and last month signaled more large increases were on the way this year.

September's consumer price report next Thursday will also help policymakers to assess their progress in the battle against inflation ahead of their Nov. 1-2 policy meeting. Financial markets have almost priced-in a fourth 75-basis points rate increase at that meeting, according to CME's FedWatch Tool.

While government data this week showed job openings dropped by 1.1 million, the largest decline since April 2020, to 10.1 million on the last day of August, there are still 4 million more vacancies than there are unemployed Americans. An Institute for Supply Management survey on Wednesday also showed several services industries reporting labor shortages in September.

There is a risk that the unemployment rate fell last month after being boosted in August by 786,000 people who entered the labor force, the most since January.

That together with seasonal adjustment issues around summer employment patterns lifted the labor force participation rate, or the proportion of working-age Americans who have a job or are looking for one to 62.4% in August from 62.1% in July.

But most of the entrants were prime-age workers, which raised the labor force participation rate for this cohort above the average rate for 2019. A repeat was not expected.

NOT IN RECESSION

"This suggests still positive monthly job gains, in excess of 100,000, will continue to put downward pressure on the unemployment rate," said Veronica Clark, an economist at Citigroup in New York. "Evidence of a still very tight labor market will likely keep the Fed hawkish."

The Fed is projecting that the unemployment rate will rise to 3.8% this year and to 4.4% in 2023. That would be above the half-percentage-point rise in unemployment that has been associated with past recessions.

With the labor market still tight, wage gains remain solid. Average hourly earnings are forecast increasing 0.3% after a similar rise in August. That would lower the annual increase in wages to 5.1% from 5.2% in August. The Atlanta Fed's wage tracker, which controls for compositional effects like skill level, occupation and geography, is running above 6%.

The average workweek is forecast unchanged at 34.5 hours, indicating firms are opting to hang on to their workers instead of cutting jobs for now. Indeed, first-time applications for unemployment benefits remain at very low levels.

"It tells you that the economy is not exactly booming but not contracting either," said Sung Won Sohn, a finance and economics professor at Loyola Marymount University in Los Angeles.

But with the headwinds from higher borrowing costs and slowing demand rising, economists expect companies will significantly pull back on hiring, with negative payrolls likely next year. Economists say businesses have been backfilling open positions as they struggled to expand headcount to match increased demand for their products, driving up job gains.

The economy has created 3.5 million jobs so far this year, even as gross domestic product contracted in the first half.

"The boost to job growth from backfilling may end sooner rather than later," said Ellen Zentner, chief U.S. economist at Morgan Stanley in New York.

"Given the slowing in labor demand we foresee coming from higher interest rates should continue, removing the pillar of support that labor backfilling has provided so far this year could lead to a faster collapse in jobs growth than normal." (Reporting by Lucia Mutikani; Editing by Andrea Ricci)