By Lucia Mutikani
WASHINGTON, Oct 2 (Reuters) – US job growth slowed more than expected in September and the nonfarm payrolls count for the prior two months was revised sharply lower, almost taking another interest rate hike from the Federal Reserve this month off the table.
The Labor Department’s closely watched employment report on Friday also showed the unemployment rate increased to 4.2% last month from 4.1% in August as more people entered the workforce. The sharp moderation in job growth likely does not mark a sudden deterioration in labor market conditions.
Economists noted that payrolls have a tendency to underperform when the Labor Day holiday falls relatively late in September, as was the case this year. There have been no signs of a broad increase in layoffs. First-time applications for unemployment benefits have been hovering at 57-year lows amid robust corporate profit growth and resilient domestic demand.
Economists said the report reaffirmed the labor market’s “low-hire, low-fire” state and likely had no impact on near-term monetary policy, with inflation remaining the key focus.
“This is a disappointing jobs report and a reminder that the low-hire, low-fire labor market never went away,” said Olu Sonola, head of US economics at Fitch Ratings. “Weak job growth, a slightly higher unemployment rate, contained wage gains and downward revisions to earlier payroll estimates give the Fed little reason to keep an October rate hike on the table.”
Nonfarm payrolls increased by 29,000 jobs last month after a downwardly revised rise of 133,000 in August, the Labor Department’s Bureau of Labor Statistics said. Economists polled by Reuters had forecast payrolls would advance by 90,000 after a previously reported surge of 162,000 in August. Estimates ranged from as low as 35,000 to as high as 180,000.
The survey of establishments showed the data for July was revised to show the economy shed 10,000 jobs, the second time this year that payrolls turned negative. All told, the economy added 60,000 fewer jobs in July and August than previously estimated. Volatility linked to the model the government uses to strip out seasonal fluctuations from the data likely accounted for both the meager payroll gains last month and the downward revisions to July and August.
Job growth averaged 51,000 per month over the past three months compared to 23,000 during the same period in 2025. Economists estimated that the economy needs to create roughly 50,000 jobs per month to keep up with growth in the working-age population. The so-called break-even rate for payrolls reflects a sharp reduction in labor supply because of retirements and the Trump administration’s immigration crackdown.
Economists, however, said they expected growing headwinds from the US-Israeli war with Iran, including high energy prices and strained supply chains, would start disrupting the labor market by the end of this year and into 2027.
Diesel prices are at record highs and could start to exert pressure beyond the transportation and agricultural sectors. Ongoing tariffs also are a source of concern, with an Institute for Supply Management survey on Thursday showing rising anxiety among manufacturers over the trade war with Canada.
Financial markets initially lowered bets on a rate hike at the US central bank’s October 27-28 meeting to 13% before lifting them to about 23%, little changed from Thursday, CME Group’s FedWatch tool showed.
The odds of further monetary policy tightening had already been slashed from about 70% at the start of the week by cooler-than-expected inflation readings for August and July.
The Fed last month raised its benchmark overnight interest rate by 25 basis points to the 3.75%-4.00% range, the first hike in three years, and flagged further increases in borrowing costs ahead. With inflation still above its 2% target, economists continued to expect a rate hike in December. Stocks on Wall Street were higher. The dollar eased against a basket of currencies. US Treasury yields rose after initially falling.
WAGE GAINS SLOW
Healthcare continued to account for the bulk of the job growth, adding 17,000 positions, a figure that was well below the average monthly gain of 33,000 in the past 12 months. Those job increases occurred in ambulatory healthcare services and at hospitals. Employment in nursing and residential care facilities dropped by 9,000 positions, which could be related to the termination of Temporary Protected Status for hundreds of thousands of Haitian immigrants.
Construction payrolls increased by 11,000, lifted by hiring of nonresidential specialty trade contractors. That could be related to the building of infrastructure to support AI. The AI spending boom likely also accounted for the 9,000 rise in manufacturing jobs. Factory employment has risen 72,000 since bottoming out last December.
Leisure and hospitality payrolls rose 10,000. There were modest job gains in the wholesale and retail trade sectors as well as the transportation and warehousing industry.
Information payrolls dropped by 10,000, while the financial activities sector shed 7,000 positions. Professional and business services employment decreased by 9,000 amid a drop of 10,900 in temporary help services. The mining and logging industry lost jobs. Government payrolls contracted 17,000, mostly in local government, excluding education.
The share of industries reporting job growth dropped to an 11-month low of 49.0% from 57.6% in August. Still, the average workweek was unchanged at 34.4 hours.
Wage growth, however, cooled. Average hourly earnings edged up 0.1% after rising 0.3% in August. That lowered the annual increase in wages to 3.0% from 3.1% in August.
Slower wage growth confirmed the labor market was not a source of inflation, but raised concerns over the sustainability of robust consumer spending and strong economic growth. Wage growth is lagging inflation, and consumers have been saving less and also dipping into their nest eggs to fund purchases.
The smaller and more volatile household survey from which the unemployment rate is calculated showed employment increased by 406,000. That was, however, insufficient to absorb the 485,000 who entered the labor force, lifting the unemployment rate from 4.1% in August. The labor force participation rate rose to 61.8% from 61.6% in August.
More people worked part-time for economic reasons, and long-term unemployment climbed. That raised the median duration of joblessness to near a 4-1/2-year high of 11.5 weeks from 11.4 weeks in August. But a broader measure of unemployment, which includes people who want to work but have given up searching and those working part-time because they cannot find full-time employment, fell to 7.6% from 7.7% in August.
“There is nothing in this report to suggest the jobs market is in real trouble, but its resilience probably isn’t on as secure a foundation as GDP growth,” said Scott Anderson, chief US economist at BMO Capital Markets.
(Reporting by Lucia Mutikani; Editing by Chizu Nomiyama, Paul Simao and Andrea Ricci )
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