US job growth falls short of expectations in September, but job market remains stable

By Lucie Mutikani

WASHINGTON, Oct 2 (Reuters) – U.S. job growth slowed more than expected in September and nonfarm payrolls for the previous two months were revised sharply lower, making it almost impossible for the Federal Reserve to raise interest rates again this month.

The Labor Department’s jobs report, closely watched Friday, also showed the unemployment rate rose to 4.2% last month, from 4.1% in August, as more people entered the job market. The sharp moderation in employment growth probably does not mark a sudden deterioration in labor market conditions.

Economists have noted that wages tend to underperform when Labor Day falls relatively late in September, as it did this year. There has been no sign of a widespread increase in layoffs. New claims for unemployment benefits are at their lowest level in 57 years, amid strong growth in corporate profits and resilient domestic demand.

Economists said the report reaffirmed the labor market situation with “low hiring and firing” and was unlikely to have any impact on monetary policy in the short term, with inflation remaining the main priority.

“This is a disappointing jobs report and a reminder that the low-hiring, low-firing labor market never went away,” said Olu Sonola, head of U.S. economics at Fitch Ratings. “Weak job growth, a slightly higher unemployment rate, muted wage increases and downward revisions to prior employment estimates give the Fed little reason to keep an October rate hike on the table.”

Nonfarm payrolls increased by 29,000 last month after a downwardly revised increase of 133,000 in August, the Labor Department’s Bureau of Labor Statistics said. Economists polled by Reuters had forecast an increase in the workforce of 90,000 people, following a rise of 162,000 previously announced in August. Estimates ranged from 35,000 to 180,000.

The establishment survey showed July data was revised to show the economy shed 10,000 jobs, the second time this year payrolls have gone negative. In total, the economy created 60,000 fewer jobs in July and August than expected. Volatility linked to the model the government uses to eliminate seasonal fluctuations in the data likely explains both last month’s meager payroll gains and the downward revisions in July and August.

Job growth has averaged 51,000 per month over the past three months, compared with 23,000 over the same period in 2025. Economists estimate the economy needs to add about 50,000 jobs per month to keep up with growth in the working-age population. The so-called breakeven payroll rate reflects a sharp reduction in labor supply due to retirements and the Trump administration’s immigration crackdown.

Economists, however, said they expected growing headwinds from the U.S.-Israel war with Iran, including high energy prices and strained supply chains, to begin disrupting the labor market by the end of this year and through 2027.

Diesel prices are at record highs and could begin to exert pressure beyond the transportation and agriculture sectors. Ongoing tariffs are also a cause for concern, with an Institute for Supply Management survey released Thursday showing growing anxiety among manufacturers over the trade war with Canada.

At the US central bank’s October 27-28 meeting, financial markets initially lowered their bets on a rate hike to 13% before raising them to around 23%, a figure that was virtually unchanged from Thursday, CME Group’s FedWatch tool showed.

The odds of further monetary policy tightening had already been reduced by around 70% earlier this week by colder-than-expected inflation figures for August and July.

The Fed last month raised its benchmark overnight interest rate by 25 basis points to the 3.75% to 4.00% range, the first hike in three years, and announced further increases in borrowing costs to come. While inflation remains above its 2% target, economists continue to expect a rate hike in December. Stocks on Wall Street were rising. The dollar weakened against a basket of currencies. U.S. Treasury yields rose after initially falling.

SLOW WAGE WINNERS

Health care continued to account for the bulk of job growth, adding 17,000 positions, well below the average monthly gain of 33,000 over the past 12 months. These employment increases occurred in outpatient health care services and hospitals. Employment in nursing and residential care facilities fell by 9,000 positions, which could be linked to the end of temporary protected status for hundreds of thousands of Haitian immigrants.

Construction payrolls increased by 11,000, driven by the hiring of non-residential specialty contractors. This could be linked to building infrastructure to support AI. The AI ​​spending boom likely also explains the 9,000 increase in manufacturing jobs. Factory employment has increased by 72,000 since the low point reached last December.

Leisure and hospitality payrolls increased by 10,000. Modest employment gains were recorded in the wholesale and retail trade sectors as well as the transportation and warehousing industry.

The information sector’s workforce fell by 10,000, while the financial activities sector shed 7,000 positions. Employment in professional and business services fell by 9,000, while temporary help services fell by 10,900. The mining and forestry industry lost jobs. The government payroll fell by 17,000 people, mainly in local administrations, excluding education.

The share of industries reporting employment growth fell to an 11-month low of 49.0%, from 57.6% in August. Yet the average workweek remained unchanged at 34.4 hours.

However, wage growth has slowed. The average hourly wage edged up 0.1% after increasing 0.3% in August. This brought the annual wage increase to 3.0%, compared to 3.1% in August.

Slower wage growth confirmed that the labor market was not a source of inflation, but raised concerns about the sustainability of robust consumer spending and strong economic growth. Wage growth is lagging inflation, and consumers are saving less and also dipping into their nest eggs to finance purchases.

The smaller and more volatile household survey, from which the unemployment rate is calculated, showed employment rose by 406,000. That, however, proved insufficient to absorb the 485,000 people who entered the labor force, pushing the unemployment rate up 4.1% in August. The activity rate rose to 61.8% compared to 61.6% in August.

More and more people worked part-time for economic reasons and long-term unemployment increased. That brought the median duration of unemployment to near a 4 1/2-year high of 11.5 weeks, up from 11.4 weeks in August. But a broader measure of unemployment, which includes people who want to work but have given up looking and those who work part-time because they can’t find full-time work, fell to 7.6% from 7.7% in August.

“Nothing in this report suggests that the jobs market is actually in trouble, but its resilience is likely not as strong as GDP growth,” said Scott Anderson, chief U.S. economist at BMO Capital Markets.

(Reporting by Lucia Mutikani; editing by Chizu Nomiyama, Paul Simao and Andrea Ricci)