U.S. Job Growth Slows Dramatically in September with Unemployment Rate Rising to 4.2%

Revisions to previous months' data revealed a lower August job count of 133,000, while July's figures shifted from a gain to a loss of 10,000, resulting in a total reduction of 60,000 jobs compared to earlier estimates.

In response to the report, financial markets reacted positively, with traders interpreting the weak job numbers as likely leading the Federal Reserve to maintain current interest rates during its upcoming meeting. Stock futures rose sharply, while Treasury yields fell after previously reaching their highest levels in over two decades. According to the CME Group's FedWatch tool, the probability that the Fed will not raise rates during its October 27-28 meeting increased to 82.8%.

Thomas Simons, chief U.S. economist at Jefferies, noted that the September figures suggest a halt to the anticipated momentum following a strong August. He emphasized that August's robust numbers may have been a rebound from weak hiring earlier in the summer.

While the establishment survey indicated a poor payroll count, the household survey—which informs the unemployment rate—showed better results. Household employment climbed by 406,000, and the labor force increased by 485,000. The participation rate rose by 0.2 percentage points to 61.8%, the highest since May. An alternative measure of unemployment, which accounts for discouraged workers and those working part-time for economic reasons, decreased to 7.6%, the lowest since January 2025.

As Federal Reserve officials assess economic conditions for possible interest rate changes, markets are now projecting a pause until December, following a rate hike of 0.25% in September. Policymakers express more concern over inflation than the labor market; however, inflation remains above the Fed's 2% target, with the latest core inflation rate at 3%. Wage growth is stagnating, with average hourly earnings up just 0.1% in September, leading to a 12-month increase of 3%, the slowest since May 2021. This is below Wall Street expectations of 0.3% and 3.1%, respectively.

Heather Long, chief economist at Navy Federal Credit Union, remarked on the frustration among Americans due to declining opportunities and wage growth declining to a five-year low, which is being eroded by inflation.

The majority of job gains in September came from healthcare, which added 17,000 positions, while construction gained 11,000, and manufacturing saw an increase of 9,000 jobs. However, government employment dropped by 17,000, and there were declines in temporary help services, information services, and financial activities. The sluggish job growth contrasts with other signs of economic strength; the Commerce Department recently revised its GDP growth estimates for the first and second quarters to 2.5% and 2.2%, respectively, with the Atlanta Fed forecasting a third-quarter GDP growth of 3.7%.