Payrolls lose altitude

September 24, 2026

We expect payrolls to rise by 95,000 in September, a slowdown from the 162,000 in August. Historically, August revisions tend to be to the upside; recent revisions have been higher. It is unclear how long that pattern will hold, given the recent rout in the bond market. Short-term rates are rising as well, in response to the Federal Reserve’s efforts to rein in inflation. 

Markets are now pricing in at least three rate hikes by June 2027; monetary policy works with a lag. The path from here to price stability is littered with potholes; hiring is a key area to watch as we move into 2027. 

The public sector is expected to add 5,000 jobs after growing by 55,000 in August. The gains are expected to remain concentrated at the state and local levels. Much of last month’s increase reflected a rebound in local education, which is unlikely to be repeated. The public sector tailwind is fading; COVID-era stimulus has been spent, while state and local government coffers are running dry,

Manufacturing is expected to add jobs again in September. The headwinds are diesel prices and higher interest rates, which will take a toll on margins as we move into 2027. A ban on diesel exports could lower prices temporarily for parts of the country while raising them for others. The Northeast and West import diesel. Global prices will rise when the US removes its exports from the market. The effort risks a whiplash effect because refining capacity will likely be redirected toward higher margin fuels or idled.  

Construction remains a bright spot, buoyed by data center projects and persistent shortages in the skilled trades. The Federal Reserve’s Beige Book confirms that employers are still struggling to find technical and trade workers, which is forcing them to pay up. Those increases matter, but they are concentrated in a relatively small corner of the economy.

Healthcare and social assistance – once the workhorses of job growth – have lost ground. Healthcare added just 13,000 jobs in August, well below its average over the prior year. The July 27 termination of Temporary Protected Status (TPS) for Haiti stripped many affected workers of employment authorization and intensified an already acute staffing squeeze. The payroll data does not track workers by immigration status, so the link is not precise. The timing is hard to ignore.

Providers have fewer workers to draw from just as Medicaid constraints are limiting their ability to bid up wages to fill openings. Those pressures will intensify in the new fiscal year. Another cliff is approaching in early October, when work authorization expires for a remaining group of Venezuelan TPS beneficiaries. The sector is being squeezed from both sides: labor supply is shrinking while funding is tightening.

Leisure and hospitality is expected to give back some of August’s sharp rebound when food services and drinking places added 59,000 jobs. Employers replaced TPS workers more quickly in that sector, but only after boosting pay. That helped lift August hiring. It is unlikely to be repeated at the same pace in September.  

The Beige Book reported softer demand in hospitality, while the August Institute for Supply Management (ISM) services employment index hovers below 50. The index is a diffusion index. Readings above 50 signal an expansion in employment; those below it signal contraction. The slowdown in discretionary spending as a drop in TSA throughput as well. Vacations are among the first things people cut when they feel squeezed. 

Average hourly earnings are expected to rise 0.3% in September and 3.2% from a year ago, a tick faster than August but still below inflation. That means purchasing power is again being squeezed, even as the labor market remains tight in select niches.

The Atlanta Fed’s Wage Growth Tracker, which tracks individual workers as opposed to overall averages, has firmed. Its three-month moving average rose to 4.1% in August from 3.8% in July. Wage growth for job stayers held at 3.6%, while gains for job switchers jumped to 5.0% from 4.4%. The premium for changing jobs is widening again. The ADP data is mixed but the premium for job hoppers has come off the lows of last year.

Unemployment up? Dependent on participation 

The unemployment rate is expected to hold edge up a bit to 4.2%. The Chicago nowcast has the unemployment rate moving up to 4.3, but much depends on participation in the labor market, which is likely to edge lower after surging in August. 

Participation among younger workers rebounded in August, but the return to school may have scrambled the seasonal adjustment. September payback would therefore look more like statistical noise than a fresh deterioration in labor supply.

The surveys: upside risk with a catch

The real-time data lean somewhat stronger than our forecast, but they do not tell a single story. ADP’s weekly pulse accelerated to an average of 20,000 private jobs per week in the four weeks through September 5, up from 12,250 three weeks earlier. That is consistent with private hiring near our estimate of 90,000. The series is new, preliminary and subject to revision; it is a signal, not a data point. 

The Indeed job posting site offers a counterweight. Job postings continue to soften across a broad swath of the economy. Retail remains especially weak. Indeed’s research suggests the labor force has declined by roughly 700,000 workers so far in 2026 as foreign-born participation falls and the workforce ages. That helps explain the central puzzle: payroll growth can slow sharply without pushing unemployment higher. We are stuck in a low-hire, low-fire labor market.

The Beige Book lands in the same place. Employment rose only slightly across the Federal Reserve districts. Hiring was healthiest in manufacturing, construction and selected services; retail and hospitality weakened. Skilled trades and technical workers remain difficult to find; the largest wage increases are tied to those shortages. Anecdotal evidence supports continued job growth but underscores how narrow it has become.

The flash PMIs are the outlier

S&P Global’s September flash survey is the most bullish signal. Manufacturing employment increased at its fastest pace in more than five years, while hiring across factories and services rose at the fastest since June 2022. The manufacturing Purchasing Managers Index climbed to 57.0 while the services index rose to 58.7; reading above 50 signal expansion. Backlogs rose as firms again reported difficulty finding qualified workers. That creates real upside risk to our payroll call. 

Still, diffusion indices measure how many firms report improvement, not how many workers are hired. Regional surveys appear less exuberant. The Philadelphia Fed’s employment index remained positive but fell sharply, with 77% of firms reporting no change in headcount. Richmond improved in September, but hiring expectations weakened. The August ISM surveys were split as manufacturing employment moved back above 50, while services employment remained in contraction. The industry surveys tilt the risk to the upside; they do not make the case for a hiring breakout.