The U.S. labor market showed significant signs of cooling in September, with the Bureau of Labor Statistics reporting Friday that employers added just 29,000 jobs — a sharp drop from August's revised gain of 133,000. The unemployment rate also edged up to 4.2%, reflecting a labor market that is losing momentum as the Federal Reserve continues its aggressive campaign to tame inflation.
The September figure comes after a series of downward revisions to prior months. The BLS now shows the economy lost 10,000 jobs in July, a reversal from the previously reported gain of 31,000, and added 133,000 in August, down from the initial estimate of 162,000. The two-month net revision subtracted 30,000 jobs from the earlier tally.
Despite the slowdown, the unemployment rate remains historically low. It has stayed below 5% since August 2021, following a pandemic-induced spike to 14.8% in April 2020 — the highest since the Great Depression. But the latest data suggests the labor market is losing its resilience as the Fed's interest rate hikes begin to bite.
Inflation, meanwhile, continues to run well above the central bank's 2% target. The personal consumption expenditures (PCE) price index, the Fed's preferred gauge, rose 3.4% in August year-over-year, down from 3.7% in July, according to the Bureau of Economic Analysis. Core prices, excluding food and energy, were up 3% annually. Energy costs have spiked in recent months amid the escalating Iran war, adding fresh pressure on prices.
Fed Chair Kevin Warsh has characterized the unemployment rate as "running consistent with full employment," and insisted that the central bank's dual mandate of maximum employment and price stability are not in conflict over the medium term. Speaking after the Fed's last rate hike, Warsh emphasized the importance of sustainable growth, saying, "Economic growth — that is ensuring continuous, sustainable, durable, economic growth — that's the business we're in." He added that the Fed's job is to "ensure price stability, which can mean that sustainable, durable, economic growth can go on for longer."
Financial markets are now pricing in a roughly 72% chance that the Federal Open Market Committee (FOMC) will hold rates at their current range of 3.75% to 4% at its next meeting on Oct. 27-28, according to the CME FedWatch tool. Several FOMC officials have signaled they expect further hikes, but they are also closely monitoring the weakening labor market.
Philadelphia Fed President Anna Paulson underscored the central bank's commitment to price stability, saying, "As always, I'll be watching the data and listening closely to what businesses and workers are telling me. But let me be clear: returning inflation to 2% is non-negotiable, and I will support the policy path that gets us there while carefully weighing risks to the labor market along the way."
The Fed's next meeting comes less than a week before the midterm elections, adding political weight to the economic data. President Trump and congressional Republicans are facing voter anger over the economy and inflation, as well as the fallout from the Iran conflict, with Democrats hoping to capitalize on those frustrations. The weak jobs report is likely to intensify the political battle over economic stewardship.
The labor market's slowdown also raises questions about the durability of the expansion. While the unemployment rate remains low, the pace of hiring is clearly decelerating. Economists will be watching upcoming data for signs of whether this is a temporary blip or the beginning of a more pronounced downturn.
For now, the Fed appears determined to stick to its inflation fight, even as the labor market cools. The coming weeks will test whether the central bank can achieve a "soft landing" — or whether the economy is headed for rougher waters.
