The U.S. labor market unexpectedly weakened in July as employers cut jobs and earlier employment figures were revised lower, according to new government data released on Friday. The US July Jobs Report raised fresh questions about the pace of economic growth and led financial markets to reduce expectations for an interest rate increase by the Federal Reserve next month.
The Labor Department reported that nonfarm payrolls fell by 23,000 jobs in July. Economists had expected the economy to add about 80,000 jobs during the month. The decline marked the first monthly drop in employment in five months.
The report also showed that job growth in May and June was weaker than previously believed. Together, those two months recorded 103,000 fewer jobs than earlier estimates suggested. As a result, average job growth over the last three months slowed to just 20,000 jobs per month.
Despite the decline in payrolls, the unemployment rate fell to 4.1% from 4.2% in June. However, the lower rate was largely linked to a shrinking labor force rather than stronger hiring.
Around 264,000 people left the labor force during July. That pushed the labor force participation rate down to 61.4%, its lowest level since early 2021. The participation rate measures the share of working-age people who are employed or actively looking for work.
Economists said the report should be viewed with caution. Hiring data often becomes difficult to measure during the summer months because of seasonal changes related to school schedules and education employment.
A large share of the job losses came from local government education positions. Employment in that category fell by 49,600 jobs, helping drive an overall decline of 53,000 government jobs during the month.
Outside of government, the labor market showed modest growth. Private employers added 30,000 jobs, matching the increase recorded in June.
Some economists argued that private payroll growth offers a clearer picture of labor market conditions and suggested that education-related losses could reverse in the coming months.
The leisure and hospitality sector also continued to struggle. Employment in the industry fell by 40,000 jobs, marking a second consecutive month of declines. Restaurants and bars accounted for more than 26,000 of those losses.
Retail employment dropped by 19,400 jobs. Many of those cuts occurred at warehouse clubs, supercenters, and large general merchandise stores.
The financial activities sector lost another 14,000 jobs. Employment in the industry has been declining for more than a year and remains well below its recent peak.
Not all sectors experienced weakness. Healthcare employers added 22,000 jobs in July, while construction companies created 22,000 new positions. Manufacturing employment also increased by 5,000 jobs.
Analysts said manufacturing gains may reflect continued investment in technology and artificial intelligence projects. Even so, the share of manufacturing industries reporting employment growth declined compared with the previous month.
The report also highlighted changes in the available workforce. The labor force has declined significantly this year, with more than one million fewer workers participating in the job market. Some economists linked the reduction to stricter immigration enforcement and changes affecting immigrant workers.
A smaller labor force means employers need fewer new jobs each month to maintain stable employment conditions. Economists estimate that between 20,000 and 50,000 new jobs per month are currently needed to keep pace with population growth.
Other indicators in the report showed mixed conditions. Household employment declined by 87,000 jobs. The number of people working part-time because they could not find full-time work increased by 123,000.
Wage growth also slowed. Average earnings rose 3.2% from a year earlier, down from 3.4% growth in June. Slower wage gains may ease some inflation pressures, though prices remain a key concern for policymakers.
Following the release of the US July Jobs Report, financial markets reduced expectations that the Federal Reserve would raise interest rates in September. Investors viewed the weaker hiring data as a sign that economic activity may be cooling.
The Fed recently kept its benchmark interest rate unchanged at a range of 3.50% to 3.75%. While some policymakers continue to support additional rate increases, future decisions are expected to depend heavily on inflation and labor market data.
Markets reacted positively to the report. Stock prices moved higher, Treasury yields fell, and the U.S. dollar weakened against several major currencies.
Although the July figures point to slower hiring, many economists do not see evidence of a sharp downturn. Instead, they describe the labor market as stable but growing at a much slower pace than in previous years. Attention will now turn to upcoming inflation data, which could play a major role in shaping the Federal Reserve’s next policy decision.
