September Payrolls Up 29,000: What It Means for Fed and Midterms

September Payrolls Miss Big

After strong growth in August, payrolls rose just 29,000 in September — far below the roughly 80,000 economists expected — a softer print that now complicates the Federal Reserve's next rate decision as policymakers assess whether the labor market is losing momentum.

The disappointment lands at a delicate moment. Fed Chair Kevin Warsh had suggested that, after raising rates by 25 basis points in September, another increase before the end of the year was likely. A weaker-than-expected job market may now slow that determination.

When the Fed meets at the end of October, the likelihood of another rate increase has dropped, though another increase by December remains a distinct possibility. The tension is familiar: with inflation remaining above 3%, and even "core" inflation well above its 2% target, there is still some reason to raise rates. Yet softening employment gives policymakers a reason to pause.

A Seesaw Year for Jobs and Wages

The labor market has followed a seesaw pattern this year. After fairly strong job growth last spring, payrolls declined by 10,000 in July and rose substantially by 133,000 in August before September’s modest growth, with both the July and August numbers being revised downward.

Most sectors either showed modest payroll growth or modest declines. Those rising include Health Care (by 17,000), Construction (by 11,000), and Manufacturing (by 9,000); those declining include Finance (by 7,000) and Professional Services (by 9,000). Declining employment in the latter two sectors could reflect a growing influence of artificial intelligence on hiring in those sectors.

Wage growth was tepid as well. On an annualized basis, wages rose just 1.6% last month, and they have risen 3% this past year — below an inflation rate of 3.4%.

Unemployment Ticks Up as Workers Return

In the household survey, the unemployment rate ticked up modestly to 4.2%, which is still relatively low. Notably, this rise was driven not by weaker employment growth but by stronger labor force participation.

The labor force had declined very rapidly earlier in the year, and was down by over 2 million workers in July compared to last September. But about 1 million workers have returned to the labor force in the past two months. Even so, the labor force is still down by 1 million over the past year, reflecting both immigrant and native-born exits from the workforce.

That distinction matters for how the report should be read. A rising unemployment rate can signal trouble when jobs are disappearing, but here it largely reflects more people coming off the sidelines to look for work. The labor force is still smaller than it was a year ago, however, which suggests the improvement in participation remains partial.

Economic Resilience, Fed Dilemma, and Midterm Stakes

The market has been fairly resilient despite shocks from the Iran war’s oil, gas and diesel price increases and tariffs, with second-quarter GDP growth revised up to 2.2%. But the 10-year Treasury yield near 5.2% is weakening housing demand and durable goods purchases, and consumer sentiment is declining. The economy relies on data center construction and federal deficit spending over 6% of GDP, while consumers have dipped into their savings.

With inflation above 3% and core inflation well above the 2% target, Fed Chair Kevin Warsh had suggested another hike after September’s 25 basis point increase. But the softer job market and weakening sentiment have lowered the odds of an October increase, though a December hike remains possible.

This is the last jobs report before the midterms. It does not fundamentally change the picture, but the mixed reports make it harder for Trump to tout economic strength.