The U.S. economy lost 23,000 jobs in July. Analysts had expected a gain of 83,000. The Bureau of Labor Statistics reported the decline Friday, a sign that the summer labor market is weakening as inflation remains elevated and Federal Reserve policymakers weigh whether to raise interest rates again.
May and June figures were revised down by a combined 103,000 jobs. May’s total dropped to 63,000 from an initially reported 129,000, and June fell to 20,000. The revisions brought the 12-month average down to just 34,000 jobs per month.
The unemployment rate dipped to 4.1%. That decline came with a catch. The labor force shrank by 264,000 people, and the participation rate fell to 61.4%, its lowest level in more than five years. Fewer Americans were working or looking for work, which mechanically lowered the jobless rate even as household employment fell by 87,000.
Job losses were concentrated in local government education, which shed 50,000 positions, and retail, which lost 19,000. Leisure and hospitality dropped 40,000 jobs, a possible consequence of the World Cup tournament ending. Financial activities fell by 14,000. Healthcare, long the leading engine of job creation, added 22,000, below its 12-month average of 36,000. Construction also gained 22,000. Private payrolls rose 30,000, but government jobs declined by 53,000.
Wage growth continued to slow. Average hourly earnings rose by just two cents for the month, bringing the year-over-year increase to 3.2%, below the 3.5% economists had forecast and the lowest reading since May 2021. Average hourly earnings for all employees on private non-farm payrolls stood at $37.62.
Stock markets rallied on the news. Investors interpreted the weak data as a signal that the Fed would hold off on raising rates. Dow Jones Industrial Average futures rose close to 200 points, and Treasury yields fell. Traders shifted their bets after the report. Odds of a rate hike in September dropped to 44%, and to 58.3% for October, according to the CME Group’s FedWatch gauge.
A central bank caught between two pressures
The Federal Reserve left its benchmark rate unchanged last month in a vote of nine to three, holding it between 3.5% and 3.75%. Inflation is running at an annual rate of 3.5%, well above the central bank’s 2% target. Several Fed officials had recently spoken in favor of raising rates as soon as September if price increases did not ease. The jobs report complicated that calculus.
Kevin Warsh, the newly appointed chair of the Federal Reserve, has offered little forward guidance on the future path of interest rates, a shift from the central bank’s previous approach. Warsh has repeatedly said he wants to bring inflation down. Prices have been rising in the wake of the Middle East conflict, which has disrupted global oil markets. Gasoline prices have gone back above $4 on average, according to AAA, and diesel is nearly $5.40 a gallon.
Nicole Bachaud, a labor economist at ZipRecruiter, said the July employment report solidified that the labor market is not out of the woods quite yet. Chris Zaccarelli, chief investment officer for Northlight Asset Management, said the report shifted the focus from inflation to risks embedded in the labor market, since many had previously assumed the Fed had no choice but to raise rates given a strong job market. Neil Birrell, chief investment officer of Premier Miton, said labor force participation was back at levels not seen since the days of Covid, meaning jobs just were not being created.
A labor force in retreat
The employment-to-population ratio slipped to 58.9%, its lowest level since May 2014. An alternative jobless measure that includes discouraged workers and those holding part-time jobs for economic reasons held steady at 7.9%. Bill Adams, chief U.S. economist at Fifth Third Commercial Bank, wrote that the unemployment rate was falling mostly for the wrong reason: not enough workers. Immigration had compensated for the aging of the workforce in the early years of the post-pandemic expansion, Adams wrote, but that was no longer happening. Dean Baker, economist and co-founder of the Center for Economic and Policy Research, noted that with immigration largely stopped and possibly now a net negative, the labor force was growing very slowly. Slower wage growth, even in the face of rising inflation, indicated it was not a very good labor market for most workers, Baker wrote.
Other data had pointed toward a July slowdown. Private employers added 44,000 jobs in July, according to the payroll firm ADP, down from 98,000 in June. Job openings decreased by 178,000 to 7.4 million in June. Layoffs, however, plunged. U.S.-based employers announced about 33,500 job cuts in July, the lowest monthly total in two years, according to Challenger, Gray and Christmas. Consumer spending increased by 0.3% in June 2026, but the personal savings rate fell to 2.7%, a four-year low.
Ellen Zentner, chief economic strategist at Morgan Stanley Wealth Management, said inflation data scheduled for release next week would probably be the deciding factor for the next rate meeting. If those numbers came in hotter than expected, a cooler labor market may not be enough to quiet calls for hikes inside the Fed, Zentner said. Democratic Senator Elizabeth Warren criticized President Donald Trump in a statement on Friday morning, saying job growth in May and June was revised down by more than 100,000 jobs, job openings had fallen, and more people were out of the labor force than at any time on record. Wage growth slowed, she said, straining families’ paychecks as they struggle to keep up with inflation.