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September’s U.S. Jobs Report Looks Weak — But the Bigger Picture Is More Complicated

The September U.S. nonfarm payrolls report initially looked like a major warning sign for the economy. Payroll employment increased by only 29,000, dramatically below expectations of roughly 83,500–90,000, while the unemployment rate edged higher from 4.1% to 4.2%.

That immediately pushed markets toward a more dovish Federal Reserve outlook. Treasury yields fell, the dollar weakened, and U.S. equities received support as traders reduced expectations for an October rate hike.

But I think there is another side to this report that deserves much more attention.

The headline payroll number was weak, but the household survey showed that employment actually increased by approximately 406,000 in September. At the same time, the labor force expanded by around 485,000, while the labor-force participation rate climbed from 61.6% to 61.8%.

This creates a significant divergence between the two employment surveys.

The establishment survey suggests that companies are barely hiring, while the household survey indicates that employment is still expanding and more people are entering the workforce.

That does not mean the payroll report is wrong. The two surveys use different samples and methodologies, so temporary divergences can occur. But it does mean that investors should be careful before interpreting September's payroll number as evidence of an imminent recession.

There is another important detail: the previous months were revised lower. July was revised from +21,000 to -10,000, while August was revised from +162,000 to +133,000. Together, those revisions reduced previously reported employment by about 60,000 jobs.

So yes, the labor market is clearly cooling.

However, cooling is not the same thing as collapsing.

The unemployment rate is still only 4.2%, and the broader U-6 unemployment measure actually declined from 7.7% to 7.6%. Average weekly hours remained at 34.4, while average hourly earnings increased only 0.1% month over month and 3.0% year over year, the slowest annual wage growth since May 2021.

From the Fed's perspective, slower wage growth can actually reduce inflation pressure.

The bigger question is inflation versus economic growth.

The Fed still has to deal with inflation above its 2% target, while the U.S. economy remains surprisingly resilient. Revised data showed stronger growth in the first and second quarters of 2026, while the Atlanta Fed's GDPNow model recently estimated approximately 3.7% annualized real GDP growth for Q3.

That combination matters.

If employment is cooling but unemployment remains relatively low, wages are moderating, inflation remains above target, and economic growth is still solid, the Fed does not necessarily have to abandon the possibility of another rate hike.

Markets have already reacted accordingly. Expectations for an October hike dropped sharply, with the probability falling into the roughly 14%–22% range after the jobs report, while the probability of keeping rates at 3.75%–4.00% increased substantially.

But December remains a different story.

In my view, September's payroll report may have changed the timing of potential Fed tightening more than it changed the direction of monetary policy.

The next major test will be inflation data.

If CPI and core inflation continue falling while employment weakens further, the Fed could remain on hold for longer. But if inflation proves sticky and economic growth stays strong, another rate hike this year cannot be ruled out.

For me, the key lesson is simple: do not trade the 29,000 headline number in isolation.

The real picture is the relationship between employment, wages, inflation, economic growth, and labor-force participation.

September showed a cooling labor market — but not necessarily a collapsing U.S. economy.

And that distinction could become extremely important for global markets in the months ahead.

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