U.S. Labor Picture: Strong Hiring but Rising Joblessness

The latest U.S. labor market data paints a mixed and confusing picture for policymakers and investors. While nonfarm payrolls rose more than expected in September, the unemployment rate climbed to its highest level in four years. Slowing wage growth, downward revisions to prior months, and a delayed report due to the government shutdown add even more uncertainty ahead of the Federal Reserve’s critical December meeting. This analysis breaks down the contradictory signals, market implications, and what the Fed may—or may not—do next.

author: Economician

published:Nov 22, 2025 1:6

category:fundamental

US September NFP data & Markets’ reaction (Video)

by Ahura Chalki

September Employment: Will They, Won't They, and Should They?

Source: Wells Fargo

Sarah House (Senior Economist | Wells Fargo Economics)

Michael Pugliese (Senior Economist | Wells Fargo Economics)

The shutdown-delayed September jobs report did not provide clarity on what the FOMC will do at its much-debated December meeting. Nonfarm payrolls rose by 119K in September, topping consensus expectations, but downward revisions to prior months' job growth took some of the shine off the September number. Furthermore, the unemployment rate climbed to 4.44%, just shy of rounding up to 4.5%. A tick higher in the labor force participation rate suggests that some of the unemployment rate increase was driven by better supply growth; nonetheless, it was the highest unemployment rate reading since October 2021 and points to the FOMC struggling to maintain the "maximum employment" part of its mandate.

We remain of the view that what the Fed should do is cut the federal funds rate by 25 bps amid an unemployment rate that is consistent with small but building labor market slack and an inflation backdrop that looks increasingly benign outside tariff-induced price increases. That said, what the Fed will do is a separate debate entirely. We suspect the Committee's hawks will point to still above-target inflation, a somewhat stronger pace of job growth, and buoyant asset valuations to make the case that there should be no cut in December. For now, we are sticking with our call for a 25 bps rate cut in December, although we acknowledge it is a close call, and a hold would not surprise us at this point.

At Long Last

The 48-day delay of the September Employment Situation leaves today's jobs report feeling dated but adds weight to private sector data released over the past seven weeks that show labor market conditions continue to soften. Nonfarm payroll employment for September increased 119K, beating consensus expectations of a 51K gain. Yet net revisions to the prior two months were once again negative (-33K) and serve as a reminder that September's initially reported strength may not look so solid in a few months' time. The three-month average pace of payroll growth improved to 62K from a reported 29K heading into today's report, but that still marks a step-down from the 83K monthly pace registered in the first half of this year and the 168K average logged in 2024.

Industry gains broadened out a bit, with the diffusion index for the net share of industries adding jobs moving above 50 for the first time in five months. Nevertheless, healthcare & social assistance and leisure & hospitality continue to account for the bulk of hiring, up 57K and 47K, respectively, in September. Total government payrolls rebounded by 22K, but the lift came at the state & local level; federal payrolls fell another 3K amid the ongoing hiring freeze. We expect to see a significantly deeper hit to federal payrolls in the October establishment survey data, which is scheduled to be published in conjunction with the November Employment Situation on Tuesday, December 16. That is when workers who participated in the federal government's deferred resignation program will be removed from the government's payroll, leading to a roughly 125K drop in federal employment.

The September jobs report also helps to fill in the picture of labor market income through September. Average hourly earnings rose 0.2% over the month and 3.8% over the past year — enough to outpace the 3.0% rise in consumer price inflation over the past 12 months. Taking into account the rate of job growth and the steady length of the workweek in September, aggregate labor market income still looks to be growing at around a 5.0% clip (chart).