Uneven jobs growth likely eases Fed hike urgency, but doesn’t remove it

Executive summary

U.S. payrolls chipped in just 29,000 in September, roughly a third of the consensus expectation of 90,000. It was coupled with downward revisions of -60,000 to the prior months, including flipping the July gain of 21,000 to -10,000. That dragged the six-month average to about 65,700.

The details remain mixed. The unemployment rate ticked up (to 4.2%), wage growth cooled, while the average workweek was unchanged. Also, the industry-level hiring was tepid as just 6 of the 11 major industry groups added workers in September.

The uneven month-to-month job growth will likely continue to frustrate markets, much as it has over the past three years. It also reinforces the "one foot on the gas, one foot on the brake" dynamic we have highlighted throughout the year, with pockets of economic strength offset by areas of moderation. It should ease the sense of urgency for the Federal Reserve (Fed) to hike interest rates again later this month. That said, there’s another round of critical inflation data that’ll be received before the Fed's October 28th policy decision.

Payroll trends – Revisions recast restaurant & bar hiring

Service-providing industries hired 28,000, while goods producers added 18,000 workers. Private payrolls rose by 46,000, knocking the six-month average down to 66,700 from 92,700 (after revisions).

Nearly half of downward revisions came from restaurants & bars, which we highlighted here last month as appearing to be out-of-step. The August tally was slashed by 25,400, recasting it as adding 33,800 rather than 59,200.

A review of the major industry trends

Education & health services regained the mantle as the largest job creating industry, adding 20,000. As usual, though, it was entirely health services as education services cut 3,000 during the month.

Construction continues to punch above its weight, adding 11,000 last month, which is more than double its 24-month average of 5,000. A large contributor was commercial specialty contractors, which includes foundation, structural, and building exterior contractors. Those gains more than offset job losses in residential specialty contractors, which sliced 7,900 workers.

Similarly, restaurants & bars added 10,800 workers in September, as did performing arts and spectator sports, which hired 6,700. Those gains helped to offset losses elsewhere within leisure & hospitality, including hotels (-3,600) and amusement, gambling, and recreational (-3,100).

Conversely, all three levels of government slashed payrolls during the month. Federal payrolls dipped by 1,000, states nixed 3,000 positions, and local governments cut 13,000 workers, including 2,000 in education.  

Jobless rate dipped, hours worked flat, while wages cooled

The unemployment rate rose by 0.1 to 4.2%. It remains just above the pre-pandemic 3-year average of 4.0%, although that’s low compared to the historical average of 5.7% since 1948.

However, the broader underemployment rate (U-6) fell to 7.8%. That’s in-line with the pre-pandemic 3-year average of 7.8% and has declined sharply since hitting 8.7% in November 2025.

The labor force saw a sizable increase, up 485,000 in September. Still, the labor force has shrunk by almost one million workers (999K), or -0.6%, in the past year.

Average weekly hours worked were unchanged at 34.4, matching the highest level since February 2023. It’s also in-line with the pre-pandemic average of 34.4. Manufacturing hours worked were also unchanged, at 40.6, the highest since early 2023. Overtime hours remained steady at 3.0 for the second consecutive month.

Average hourly earnings rose by 0.1% month over month, well below the pre-COVID three-year average of 0.26%. The year-over-year pace for all workers slipped to 3.0%, which is in-line with the pre-pandemic average of 3.0%.

Wages for rank & file workers—officially known as production & nonsupervisory employees—rose 0.2% during the month, but the annual pace held steady at 3.3%, which is above the pre‑pandemic 3.0% average. 

Our take

As we suspected, the hiring in August wasn’t as strong as initially reported, which we attributed to a combination of seasonal adjustments, among other factors. Likewise, we have a hunch that the September totals were somewhat understated.

Zooming out – the industry results are moving further from their recent trends. Specifically, manufacturing has improved with a six-month average of adding 9,000 after an ugly three-year span that lost 315,000 workers during 2023 to 2025. We think hiring within manufacturing should accelerate modestly as the industry continues to gather momentum.

Similarly, non-residential construction is below our expectations, especially considering the “great data center buildout” that’s occurring. Conversely, financial activities, government, and professional & business services are dragging more than we’d expect.

Meanwhile, the other details continued to paint a more nuanced picture. Average hourly earnings have slowed on a monthly basis, while the year-over-year pace is more or less back to the pre-COVID pace. Still, wage growth for rank & file workers remains above the pre-COVID pace, which is likely to be a combination of state-level factors (roughly half of all states have increased minimum wages) and a continued scarcity of workers. And that’s evident in the persistently low unemployment rate by historical standards.

Put together, the report reflects an uneven economy where some industries are flourishing, such as health care, while others are struggling, like residential housing. 

Alas, the Iran conflict casts a long shadow over the economic outlook. The extended delay in fully reopening the Strait of Hormuz heightens the risks as cooler inflation is seemingly tied to an Iran deal. For the Fed, this report probably doesn’t materially alter the near-term growth outlook, nor does it inflame the inflation debate. And frankly, it shouldn’t, as inflation remains the Fed’s focus, although we’re still not convinced what more rate hikes accomplish with respect to the underlying problem – crude oil prices. Thus, inflation will continue to challenge the Fed until there is a deal to reopen the Strait of Hormuz. 

Bottom line

The labor market remains uneven but generally resilient, particularly on the industry level. Wage growth has largely normalized to pre-pandemic rates, though persistent labor shortages are keeping pay gains elevated for rank-and-file workers. For the Fed, the report changes little, as inflation risks remain tied more to the Iran-related energy shock than to domestic labor market conditions.