The U.S. labor market showed notable weakness in September 2026, adding only 29,000 jobs, significantly below economist expectations of 84,000. The unemployment rate rose to 4.2%, partly due to a surge in the labor force as more individuals sought employment. August’s job gains were also revised down to 133,000, while July now shows a loss of 10,000 jobs, resulting in 60,000 fewer jobs overall than initially reported. Despite these disappointing figures, markets responded positively, betting that the Federal Reserve will keep interest rates unchanged during its October meeting.

The report highlighted that job gains were mainly concentrated in healthcare, construction, and manufacturing sectors, with healthcare adding 17,000 workers alone. Conversely, government employment fell by 17,000, and sectors like temporary help services, information, and financial activities saw job losses, the latter partly attributed to concerns about artificial intelligence’s impact on employment. Wage growth continued to slow, with average hourly earnings rising only 0.1% in September and posting their weakest annual gain since May 2021 at 3%, signaling softer inflation pressures on labor costs.

Market expectations shifted markedly following the report, with futures rising and Treasury yields dropping from recently high levels. The likelihood that the Fed would maintain the current interest rate was put at 82.8% according to the CME Group’s FedWatch tool. Economists like Thomas Simons from Jefferies noted the September data as a decisive factor against an October rate hike, suggesting that August’s improvements were a temporary rebound rather than sustained momentum.

Despite weaker hiring, other economic indicators remain robust, such as strong GDP growth revisions for the first two quarters and a strong third-quarter forecast from the Atlanta Fed. Fed officials appear focused more on inflation, which remains above their 2% target despite easing wage pressures. The labor market’s stability amid these mixed signals led economist Heather Long to describe conditions as "stable," though she acknowledged the frustration of Americans facing stagnant wage growth amid inflationary pressures heading into the holiday season.