The US economy added just 29,000 jobs last month and the unemployment rate ticked up to 4.2%

By Alicia Wallace, CNN

(CNN) — The US labor market hit a soft patch in September as the economy added just 29,000 jobs and the unemployment rate increased to 4.2%, new Bureau of Labor Statistics data showed Friday.

The latest jobs report – and the final official employment snapshot before the midterm elections – also showed that recent months’ hiring was weaker than previously thought and that wage growth slowed, putting Americans’ paychecks further behind the 8-ball at a time when inflation has accelerated.

Through September, the economy has added an average of 68,000 jobs per month, BLS data shows. That’s stronger than last year (when fewer than 10,000 jobs were added per month); however, the current pace of hiring is running well below pre-pandemic averages.

All told, it remains a “low-hire, low-fire” labor market that’s undergoing a structural shift as a result of an aging population, increased Baby Boomer retirements, a decline in immigration and the advancement of artificial intelligence.

“We are just seeing the labor market holding up,” said Kory Kantenga, chief economist at LinkedIn. “It’s a slow labor market, hiring’s still slow, we still see elevated competitiveness, job seekers still have low confidence; but we don’t see any red flags that the labor market is getting worse.”

September’s job gains marked a slowdown from August, when a downwardly revised 133,000 jobs were added. (Economists had previously cautioned that August’s surprisingly strong gains likely reflected some seasonal factors that overstated hiring activity.) In addition, July turned negative, with 10,000 jobs lost (previously a 21,000-job gain).

Employers were expected to add about 90,000 jobs in September with an unemployment rate holding at 4.1%.

Unemployment ticked up in September in part because more people entered or re-entered the labor force. The labor force participation rate moved higher last month.

The annual rate of wage growth slowed for the fourth month in a row, landing at 3% in September, which is the lowest since May 2021.

Tepid gains across industries

The job market has mostly been holding up despite a growing list of threats to hiring, from an aging population and the rapid adoption of AI to higher oil prices, policy uncertainty and the war with Iran.

Healthcare, buoyed by an aging population in need of more medical services, has driven much of the employment gains in recent years and continued to do so in September. Healthcare and social assistance added 23,000 jobs, a modest uptick for a sector that added 57,000 jobs per month last year.

“We’re seeing healthcare hiring slow,” Kantenga told CNN in an interview. “If we keep going in the direction that we’re going today, it’s certainly a more fragile labor market.”

The construction sector notched employment gains for the seventh month in a row, adding 11,000 jobs. The bulk of the gains came from the non-residential side, a likely reflection of the massive investment in AI-related infrastructure such as data centers.

The manufacturing sector extended its streak of employment gains to four months by adding 9,000 jobs in September.

Still, more industries lost jobs than added them, BLS data shows.

The public sector – primarily state and local governments – shed jobs last month as did white-collar industries such as information (tech), professional and business services, and financial activities.

Notably, temporary help services (which had a net loss of 10,900 jobs) drove the decline in the professional services sector.

“This may signal weakening demand for hiring in the coming months,” ZipRecruiter economist Nicole Bachaud wrote Friday. “Instead of changing headcount for their permanent workforce, employers often turn to temp services to scale up and down more quickly, to be able to respond to changing economic conditions.”

Pay growth slows as prices pick up

Stocks rose and bond yields fell as traders pared back bets for a rate hike from the Federal Reserve at its meeting later this month. Treasury yields moved lower: The key 10-year yield fell to 5.21%, but is still trading at multi-year highs.

“Today’s report may revive the ‘bad news is good news’ narrative, but hoping for a weaker labor market just to secure easier financial conditions is a poor tradeoff,” Bret Kenwell, US investment analyst at eToro, said in a note.

“Lower rates may support markets in the near term, but a meaningful deterioration in hiring and income would eventually weigh on consumer spending and economic growth,” he said.

“Inflation remains a problem, but a breakdown in the labor market would create an entirely different one.”

The labor market remaining stable is good news for the Fed and allows central bankers to keep laser-focused on inflation, but Friday’s employment numbers will only continue Americans’ already sour moods about the economy, Heather Long, chief economist at Navy Federal Credit Union, wrote Friday.

“Americans are frustrated by the lack of opportunities right now,” she wrote. “Wage growth fell to a new 5-year low and is being wiped out entirely by inflation. That stings heading into the holidays.”

The latest jobs numbers underwhelmed expectations and highlight the constrictions in labor supply; however, inflation remains the biggest concern moving forward, said Mike Reid, head of US economics at RBC Capital Markets.

“It’s a combination of tariffs still being in play and energy costs starting to spill over,” he said, noting elevated freight costs. “The real challenge for the US economy is the inflation pipeline is heating up.”

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CNN’s John Towfighi contributed reporting.