Does the latest payroll data really mean the labor market is weak?

September's labor report may be sending mixed signals

The headline number of 29,000 new jobs was disappointing and represents a meaningful slowdown from the stronger payroll growth recorded earlier in the expansion.

Numbers such as this would typically raise concerns about slowing economic momentum since employment and income growth are key drivers of consumer spending, which accounts for about two-thirds of the U.S. economy. The labor-supply backdrop also matters. Slower population growth, an aging workforce, and potentially slower growth in immigration-related labor supply mean the economy may require fewer monthly payroll gains to keep unemployment from spiking. In this context in today’s environment, numbers that might appear weak amid a faster-growing labor force may not be cause for major concern.

Despite weaker hiring, other parts of the economy remain relatively resilient. Several crosscurrents help explain why the payroll headline may overstate the deterioration:

• Corporate earnings continue to surprise positively.
• Productivity measures have improved over the past several quarters.
• Business spending on technology and AI infrastructure remain robust.
• Labor demand has moderated far more than layoffs have increased.
• Labor supply is growing more slowly, reducing the number of new jobs needed to maintain balance.

Hiring demand has normalized—not collapsed

The measures of hiring demand reinforce this distinction. The JOLTS openings rate has fallen sharply from its 2022 peak but remains near 4.3%,² while the share of small businesses reporting unfilled positions has also retreated from post-pandemic highs and remains around 30%. In other words, employers are posting fewer jobs and finding it easier to hire, but demand for workers has not disappeared. That helps reconcile September’s modest 29,000 payroll gain with continued economic resilience: weaker hiring reflects both cooler demand and a less acute labor shortage, rather than a surge in layoffs.

The labor market story may be shifting from jobs to productivity

For decades, economic growth has relied on one of two things: More workers and an increase in production per worker. The post-pandemic recovery was largely driven by more workers. With labor supply growing more slowly, the next phase of expansion may depend increasingly on productivity. Across industries, executives are increasingly asking a new question: Can technology enable existing employees to be more productive before additional hiring becomes necessary?

This is where AI comes into play. The introduction of AI may not lead to widespread job displacement. Instead, it may take the form of productivity gains that allow businesses to sustain growth while expanding their workforce at a more gradual pace, in our view.

AI may automate pieces of the job, but that is very different from replacing the job entirely. The near-term AI labor-market story may be augmentation first, displacement later.

AI adoption is highest where employment is least concentrated—at least for now

Technology and media, along with finance and insurance, have the highest rates of AI use, but together represent a relatively modest share of overall employment (Exhibit 1). By contrast, large sectors such as health care and retail fall closer to the middle of the adoption spectrum, while accommodation and food services continue to lag. That pattern argues against assuming an immediate, economy-wide employment shock: AI’s first effects are likely to emerge in digitally intensive sectors and specific tasks, with wider labor market consequences hinging on how rapidly adoption diffuses across the broader economy.

The chart above also measures adoption, not realized productivity gains. The next test is whether broader AI use translates into measurable improvements in output, margins, and revenue per employee. If AI allows financial advisors to automate administrative workflows and software developers to write code faster, economic output can continue growing even as employment growth in those industries slows.

The productivity opportunity may be significant today, but its transformative potential depends on adoption spreading to sectors that employ a larger share of the workforce. If those gains fail to materialize, slower hiring could weigh on income, consumption, and earnings.

What does all of this mean for markets?

Equities: Earnings may matter more than payrolls

Investors often assume slower hiring leads directly to weaker earnings. But if productivity gains, slower labor-force growth, and task-level AI augmentation offset labor softness, earnings growth could remain more resilient than economic data alone might suggest. That distinction matters to investors. Companies that grow revenue with fewer incremental hires may benefit from stronger margins and earnings growth. Potential beneficiaries may appear across sectors—including technology, financials, health care, industrials, and select consumer businesses. The opportunity is likely to be company-specific, favoring firms that can demonstrate adoption and measurable operating leverage rather than sectors with AI exposure in name only.

Fixed income: A potentially supportive backdrop

The weaker payroll report may reinforce expectations for a less hawkish policy environment, but slower labor supply complicates the message: The economy may need fewer jobs to remain balanced. A gradually cooling labor market could support duration if bond yields decline, while current yields continue to provide income if rates remain elevated.

Portfolio construction: Broadening beyond the AI winners

Most investors have focused on companies building AI. The next phase may broaden toward AI users—companies that can demonstrate higher revenue per employee, improving margins, or faster output growth without relying primarily on workforce reductions.

Why this matters for investors

The labor market is slowing, but slower hiring need not signal recession when coupled with a slowly expanding labor force. For investors, jobs alone are no longer the signal to watch. The focal point should be whether productivity can keep economic growth and profits advancing even as hiring slows.