Labor market faltered in September as jobs increased by just 29,000, unemployment rate rose to 4.2%

The U.S. economy created far fewer jobs than expected in September, pointing to a surprising soft spot in the labor market and broader economy.

Nonfarm payrolls rose a seasonally adjusted 29,000 for the month while the unemployment rate increased to 4.2%, the Bureau of Labor Statistics reported Friday. Economists surveyed by Dow Jones had been looking for job growth of 84,000 and an unemployment rate of 4.1%.

In addition to the weakness in September, the August jobs count was revised lower to reflect a gain of 133,000 while July switched from a gain to a loss as payrolls fell by 10,000. The revisions in total showed 60,000 fewer jobs than previously reported.

Market reaction was swift to the report, with traders interpreting the soft jobs numbers as good news as they likely further cemented the Federal Reserve staying put at its October meeting.

Stock futures rose sharply after the release while Treasury yields slumped after recently rising to levels not seen since the early part of the century. Market-implied odds that the Fed will hold rates steady at its Oct. 27-28 meeting jumped to 83.7%.

"For the Fed, this number should be the nail in the coffin for an October hike," Thomas Simons, chief U.S. economist at Jefferies, said in a note.

"The payroll data surged in August, and we had expected the momentum to continue this month, given the historically low prints on jobless claims in recent weeks," he added. "However, it now appears that the August number was nothing more than a rebound from very weak hiring in June and July."

Fed officials more closely watch the unemployment rate than the headline payrolls numbers.

The household survey, which is used to calculate the jobless level, was a bit better than the establishment survey, which is used to derive the payrolls count.

Household employment rose by 78,000 for the month, while the labor force swelled by 485,000 and the participation rate, which counts those working or actively searching for a job as a share of the total labor force, increased 0.2 percentage point to 61.8%, its highest since May.

An alternative measure of unemployment, which includes discouraged workers and those holding part-time jobs for economic reasons, edged down to 7.6%, its lowest since January 2025.

The report comes with Federal Reserve officials weighing the state of the economy and how it should impact their next interest rate move.

Following statements in recent days from central bank policymakers, markets have recalibrated expectations and now expect the rate-setting Federal Open Market Committee to hold off until December for their next hike. The FOMC raised benchmark rates a quarter percentage point in September.

Policymakers largely see inflation a larger threat to the economy than the labor market, which had shown resilience in recent months. The data has painted a picture of a low-hire low-fire economy, with weekly jobless claims low and one indicator showing layoffs at their lowest rate in four years.

Inflation, though, has held well above the Fed's 2% target. The most recent indicator of the central bank's preferred gauge showed core inflation at a 3% annual rate.

Wages, though, continued to show signs of disinflation.

Average hourly earnings increased just 0.1% in September, putting the 12-month gain at 3%, the lowest since May 2021. Wall Street had been looking for respective readings of 0.3% and 3.1%. The average work week was unchanged at 34.6 hours.

Most of the monthly job gains came from health care, which added 17,000 workers. Construction was up by 11,000 and manufacturing added 9,000.

Government employment fell by 17,000 while temporary help services saw a decline of 11,000 and information services lost 10,000 amid worries over the impact artificial intelligence may have on the jobs picture. Financial activities also saw a drop of 7,000 jobs.

The weak job growth comes despite signs of strength elsewhere.

On a macro level, economic growth has been strong.

Earlier this week, the Commerce Department revised its count of both first- and second-quarter gross domestic product growth, to 2.2% and 2.5% respectively. The Atlanta Fed is tracking third-quarter GDP at 3.7%.