The Job Market Just Hit the Brakes. Here's What It Means for Your Money.

The September jobs report was supposed to show a labor market holding steady. Instead, it showed one running out of gas.

The U.S. economy added just 29,000 jobs last month, according to the Labor Department. Economists were expecting about 90,000. And the months before it were weaker than we thought: July was revised from a small gain to a loss of 10,000 jobs, the first monthly drop in over a year, and August was cut from 162,000 to 133,000. Together, that's 60,000 jobs that turned out never to have existed.

The numbers that matter

• Jobs added: 29,000 (forecast: about 90,000)
• Unemployment rate: 4.2%, up from 4.1%
• People looking for work: 7.1 million, including 1.9 million who have been searching for six months or more
• Pay: average hourly earnings rose just 5 cents, to $37.81. That's up 3.0% from a year ago, while inflation is running near 3.4%. In other words, the typical paycheck is quietly losing ground.

The weakness was broad. Health care (+17,000), construction (+11,000) and manufacturing (+9,000) added a few jobs. Financial firms cut 7,000. Almost every other industry barely moved.

There is one small silver lining: part of the rise in unemployment came from people coming back into the workforce to look for jobs, not from a wave of layoffs.

Why stocks went up on bad news

You might expect a weak jobs report to sink the stock market. It did the opposite: the Nasdaq rose more than 1% and the S&P 500 about 0.7% in afternoon trading.

The reason is the Federal Reserve. The Fed raised interest rates on September 16, to a range of 3.75% to 4.00%, because inflation is still too high. Investors had been bracing for another hike at the Fed's next meeting in October. A cooling job market makes that much less likely: traders now put the odds of an October hike at about 20%, down from 64% a week ago.

Fewer rate hikes are good news for stocks, which is why Wall Street cheered. As economist Mohamed El-Erian put it, labor demand is "weak across the board" and "flashing yellow."

What it means for you

• Savings and CDs: if the Fed stops raising rates, the yields on savings accounts and new CDs are probably close to their peak. If you've been waiting to lock in a CD, the window may not stay open forever.
• Bonds: the 10-year Treasury yield fell to about 5.18% from 5.24% after the report. When yields fall, the prices of bonds you already own go up, so bond funds got a lift today.
• Stocks: markets like the idea of a Fed pause. But a job market that keeps weakening eventually means slower spending and lower profits, which is not good news for stocks over time.
• Mortgages: mortgage rates tend to follow the 10-year yield. Today's dip helps a little, but rates remain far above where they were a few years ago.

What to watch next

The Fed still has an inflation problem; that's why it raised rates just two weeks ago. Not everyone thinks one weak report changes its plans: Natixis economist Chris Hodge said the data "won't shift the broader decision-making calculus for the Fed as inflation remains the supreme concern."

The next big test is the inflation report later this month. If prices cool along with the job market, the Fed can relax. If inflation stays hot while hiring slows, the Fed is stuck between two bad choices, and that's when markets get nervous.