Nonfarm payrolls rose by just 29,000 in September against a forecast of 84,000, and the unemployment rate rose to 4.2%, according to the Bureau of Labor Statistics. The revisions made the picture worse. Job gains for July and August were cut by a combined 60,000, and August now stands at 133,000 after first printing at 162,000. The three month average for headline payrolls is now around 50,000, and the economy has averaged 68,000 jobs per month through September. The BLS itself described the payroll and unemployment moves as little changed, and employment in all major industries changed little over the month. The weakness also contrasted with the private sector’s early read, since the ADP report showed private payrolls up 90,000 in September.
The unemployment rate rose for a better reason than the payroll number suggests. Part of the increase reflected a rise in the participation rate to a four month high of 61.8%, which means more people were entering or returning to the job market rather than being pushed out of work. The sector detail was soft but not alarming. Health care added 17,000 jobs, well below its prior twelve-month average of 33,000, while manufacturing gained 9,000 jobs for a fourth straight month, the slowest pace in that run but still an improvement on a sector that ended 2025 after thirteen consecutive months of losses. The BLS also showed construction up 11,000, financial activities down 7,000, and residential care facilities down 9,000. Seasonal adjustment may have distorted the sequence, as Bank of America economists had warned that August benefited from an unusually favorable seasonal factor, raising the risk of a payback in September. Wages were the weakest piece: average hourly earnings rose only 0.1% from August and 3% from a year earlier, the slowest annual pace since 2021.
For the Federal Reserve, the report lands in a delicate spot. Chair Kevin Warsh said after the September meeting that the unemployment rate is running basically consistent with full employment, and a rate of 4.2% does not contradict that view. The miss may be enough to persuade officials to hold rates steady this month, since they remain more focused on bringing down inflation. Markets responded accordingly, as S&P 500 futures rose, Treasury yields and the dollar declined, and traders trimmed bets for a Fed rate hike this year. Slow payroll growth also has to be read against a shrinking labor supply. One economist estimated that the economy needs only about 35,000 jobs a month to keep the labor market stable, given demographics and tight immigration policy. By that yardstick, 29,000 is a modest shortfall rather than a collapse.
The tension is that the labor market is stable on the surface and thinning underneath. Layoffs have remained limited, but corporations have been slow to make new hires, which leaves workers with job security but little bargaining power. Wage growth of 3% is, by Bloomberg’s estimate, probably trailing inflation for the sixth consecutive month, so households are absorbing a real income squeeze at the same moment hiring is cooling. If participation keeps rising while employers keep hiring at a pace near 50,000 a month, the unemployment rate will drift higher even without a wave of layoffs. That would leave the Fed weighing an inflation fight against a softening jobs market, with the next read on that balance coming when the October employment report is published on November 6.
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