The September jobs number
September payrolls rose 29,000. The forecast was near 90,000. The miss stood out, but the bar for a stable labor market is low: the economy only needs about 35,000 new jobs a month to hold steady.
Inside the report, government jobs fell sharply and temporary help fell sharply. The month was soft across the board. The rise in unemployment came from people entering the workforce, drawn by higher wages. That is a "virtuous" rise in unemployment - people want to work. Breaking the unemployment rate out to three decimal places is mostly noise.
This confirms a "low fire, low hire" U.S. labor market. Two forces hold it back: long-term demographics no one can change, driven by retiring baby boomers, and tight immigration policy set by the Trump administration. Together they mean little growth in labor supply. Hiring will not return to the roughly 200,000 a month pace common over the past 40 years. The key question is whether there is enough native-born labor to meet demand. The answer is no, and the border will not reopen to foreign workers under current policy, so this is treated as a fixed, outside factor.
Wages, inflation, and the middle class
The CPI release comes October 14. The focus will be on recent energy price increases and on wages. Real wages, adjusted for inflation, have been flat since March. The worry is whether they start falling again. A 3% rise is not a concern, and second-order effects are not a worry, but the health of the middle class is, as months pass with no real wage growth.
Americans have been stretched for over five years by one supply shock after another: trade and tariffs, war-driven energy prices, and the unexpected rise of AI. AI is pulling heavily on basic commodities and goods used early in production, and it is crowding out other private and public demand for credit. All of this pushes inflation and interest rates higher. That is the right frame for reading the data.
State of the labor market
Unemployment sits at 4.2%, a good description of full employment. The labor market is in decent shape, though a growing number of people face longer stretches of joblessness, and the reasons for that deserve study. The three-month average of job gains is 51,000. With the revised data, that is the exact same three-month average as last month, so the labor market stands on solid footing.
Revisions
July was revised down to a loss of 10,000 jobs. August was cut to a gain of 133,000 from 162,000, still a big gain. These revisions are not a worry, given the slow labor-supply growth locked in by demographics.
The Fed
A soft September reading takes an October move off the table for the trading community. I did not share that camp before, but the data now solidifies it, a direction markets were already moving. My own view: at least two more rate moves, one in December and likely one in March of next year. Skipping October gives the Fed an out just ahead of the election, with attention returning in December.
The recent PCE reading was benign, but core services inflation excluding housing rose 0.4%, which signals service-sector inflation remains stubborn and sticky, on top of energy problems tied to Middle East policy. There is no fault in the Fed taking more time to read the economy. Fed Vice Chair Philip Jefferson said yesterday he wanted more time before acting, and echoed the chair's line that inflation has been too high for too long.
A caution to traders: do not overreact to moves in the overnight index swap market or the federal funds rate. Those markets are thin and illiquid, and policymakers only focus on them 48 to 72 hours before major decisions. No one should put much weight on what they say about December.
The wider economy
Growth this quarter should run between 3.5% and 4%, with some upside risk. The economy sped up into midyear, seen in both the PMI and ISM data, and looks far better than it did in the first four or five months. Much of that early weakness was noise from trade policy and inventory swings tied to trade uncertainty. Some activity is being pulled into the third and fourth quarters to get ahead of tariffs, such as those on Canada and others that may follow. Growth may slow a bit next year, but right now it looks strong.
Drilling into the drivers, the sectors tied to artificial intelligence and the rebuild of the economy's underlying infrastructure look outright hot. That is why even otherwise dovish Federal Reserve board members are getting worried. Low rates, liquidity, and leverage are the "holy trinity" of the trading community, and both leverage and liquidity will be somewhat constrained going forward.
