Employment report September 2025

Resilience on the surface, fragility beneath

• At first glance, September’s headline payroll gain appears reassuring, but a closer look reveals that job growth remained fragile and narrowly concentrated heading into the longest government shutdown on record. The economy added more jobs than expected in September with payrolls rising by 119,000, but the unemployment rate ticked up to 4.4% – its highest level since late 2021. After factoring in a 33,000 downward revision to prior months’ gains, the three-month trend settled at a modest 62,000.
   
• Job growth was mixed in September. Goods-producing industries added 10,000 jobs thanks to a rebound in construction employment, the first positive contribution in four months. The services sector added 87,000 jobs, led by strong job creation in healthcare and social assistance and leisure and hospitality, along with moderate gains in retail and wholesale trade. Meanwhile, the professional and business services, manufacturing, and transportation sectors shed a cumulative 51,000 jobs, while the information sector recorded no job growth.
   
• Still, only a few sectors are doing the heavy lifting for the labor market, with healthcare and social assistance and leisure and hospitality not only leading job creation but also accounting for most payroll gains in recent months. Combined, these two sectors made up 90% of September’s job increase. Without them, payrolls would have declined in each of the previous four months, totaling 233,000 jobs lost – a clear sign of how narrowly concentrated job growth has become.
   
• Looking ahead, the prolonged shutdown will preclude the Bureau of Labor Statistics from releasing October’s unemployment rate – the first such disruption since 1948 – but we expect a sharp drop in federal employment in October, with payrolls likely falling by 100,000 to 150,000. Into 2026, constrained immigration will limit labor supply and reduce the breakeven pace of employment growth to between 0 and 50,000 jobs per month. Businesses are expected to scale back hiring and execute targeted layoffs to manage rising input costs, especially those driven by tariffs.
  
  
• Though the September jobs report may feel stale after weeks of data blackout, it is the only official labor market snapshot the Fed will have before the upcoming December meeting. While the mixed jobs data did not provide more clarity on a December cut, the cautious tone in recent Fed communications suggest a more measured pace of easing amid heightened uncertainty and uneven inflation dynamics. We expect the Fed to pause in December and resume easing in January, and we forecast a total of 50 basis points of easing in 2026.

In the details

Private sector payrolls rose by 97,000 in September, while government employment increased by 22,000 with federal payrolls continuing to shrink (-3,000) and gains concentrated at the state (+16,000) and local (+9,000) levels. The diffusion index of private employment rebounded to 55.6% from 49.0%, suggesting job growth was a bit more broad-based than in August but still below historical norms.

Goods-producing industries rose by a modest 10,000 jobs, driven by a rebound in construction (+19,000), while manufacturing (-6,000) shed jobs for the fifth consecutive month. Service-providing industries added 87,000 jobs, with healthcare and social assistance (+57,000) and leisure and hospitality (+47,000) accounting for most of the gains. Retail (+14,000) and wholesale trade (+9,000) posted moderate increases, but these were offset by notable declines in transportation and warehousing (-25,000) and professional and business services (-20,000). Employment in the information and financial sector was flat.

The unemployment rate ticked up to 4.4%, its highest since October 2021, as the labor force participation rate edged up to 62.4%. The employment-population ratio was unchanged at 59.7%. Long-term unemployment remains elevated, with 1.8 million people jobless for 27 weeks or more, accounting for nearly a quarter of all unemployed. On the wage front, average hourly earnings rose a modest 0.2% in September, with the year-over-year wage growth rate steady at 3.8%. Employers continue to focus on wage containment amid lingering uncertainty and cooler demand. 

Overall, it appears that the labor market is now operating at stall speed, with underlying indicators suggesting subdued forward momentum heading into 2026. High-frequency indicators from job-posting firms show openings have dropped to their lowest levels since early 2021, while the hiring rate remains near a decade low outside the pandemic period. Worker Adjustment and Retraining Notification (WARN) notices and layoff announcements have also picked up, though there are no signs of broad-based layoffs.

Looking ahead, job growth is likely to remain subdued as firms continue to restrain hiring in response to slowing demand and persistent policy uncertainty. Job growth is expected to remain below trend, averaging roughly 30,000 per month into 2026, and the unemployment rate is likely to drift higher toward 4.7% in early 2026.

What this means for businesses

For business leaders, the latest labor market trends signal a need to balance near-term caution with longer-term agility. Wage pressures are moderating, but persistent labor market softness and policy uncertainty mean that strategic workforce planning and cost management should remain top priorities. Leaders should prepare for continued volatility in hiring and retention, and ensure their organizations are positioned to respond quickly to shifts in demand, talent availability and the broader economic environment.

The views reflected in this article are the views of the author(s) and do not necessarily reflect the views of Ernst & Young LLP or other members of the global EY organization.