Weak Hiring Fuels Stagflation Worries

The US economy added just 29,000 jobs in September, well short of the 90,000 expected, and the unemployment rate ticked up to 4.2% from 4.1%. Weaker hiring, slowing wage growth and persistently higher inflation are a combination I am watching closely.

Key takeaways

Hiring stalled, and the past got weaker, too. Non-farm payrolls rose by a net 29,000 in September, far below expectations. The private sector added 46,000 jobs, while government jobs lost 17,000. Prior months were revised down by a combined 60,000 jobs: August was cut by 31,000 to 133,000 from 162,000, and July was cut by 29,000 to -10,000. I believe the US’s tariff policy has created significant economic policy uncertainty, which seems to be tamping down hiring.

Wages are still not keeping up with inflation. Nominal wage growth continues to slow. Average hourly earnings rose just 0.1% month over month (m/m) and 3% year over year (y/y) in September, well below the 3.5% y/y pace in June. And wage growth is not keeping up with inflation; 3% y/y is materially lower than August’s headline CPI reading of 3.4% y/y.

Healthcare is cooling. Healthcare saw the largest increase in jobs for the month at 17,000, but that is far weaker than it had been earlier in the year; average job growth in the sector over the past 12 months is 33,000. I have worried that the One Big Beautiful Bill, which places fiscal pressure on rural hospitals and nursing homes, would impact healthcare job creation. We will want to follow this closely.

Beyond healthcare, gains were thin. Very modest job growth occurred in construction (+11,000), leisure and hospitality (+10,000) and manufacturing (+9,000). Job losses occurred in information (-10,000), professional and business services (-9,000) and financial activities (-7,000). I think the decline in information is AI-related, as tech companies seek to free up cash to invest in the AI buildout.

Participation edged up. The labor force participation rate rose slightly to 61.8%, helped by mass deportations and Baby Boomer retirements.

Market reaction, looking ahead

Right after the release of the report, stocks rose on the view that “bad news is good news” – that a weak jobs report means a Federal Reserve (Fed) rate hike in October is off the table. I agree that it seems almost a certainty that the Fed will not hike rates later this month, and that is already helping to ease bond yields. However, we have to recognize that rising inflation expectations (and resulting rate expectations) are not the only driver of higher yields; concerns about fiscal sustainability also play a role, and those concerns are not going away. I expect rates to continue to move higher at the long end, albeit perhaps at a slower pace in the very near term.

While this is just one jobs report, it does support my view that stagflation is a bigger risk than many realize.