US suffers unexpected job losses in July

Source Credit : Portfolio Prints

The U.S. economy unexpectedly shed jobs in July, while employment gains in the previous two months were revised sharply lower, signaling a loss of momentum in the labor market and reducing expectations that the Federal Reserve will raise interest rates next month.

The Labor Department’s closely watched employment report on Friday showed nonfarm payrolls falling by 23,000 last month, the first decline in five months. Economists polled by Reuters had expected payrolls to increase by 80,000, following a previously reported gain of 57,000 in June.

The report also showed that the economy added 103,000 fewer jobs in May and June than previously estimated. Average monthly job growth over the past three months slowed to just 20,000, compared with 77,000 in the three months through June.

The unemployment rate nevertheless fell to 4.1% in July from 4.2% in June. But the decline was largely driven by a shrinking labor force rather than stronger employment. Some 264,000 people left the labor force last month, pushing the labor force participation rate down to 61.4%, its lowest level in nearly five and a half years.



The weakness in hiring was concentrated in several sectors, particularly local government education, leisure and hospitality, and retail. Economists, however, cautioned against interpreting the report as evidence of a sudden deterioration in labor market conditions.

"This is the third summer in a row that we have seen unexpected weakness in the labor market," said Stephen Stanley, chief U.S. economist at Santander U.S. Capital Markets. "Policymakers broadly see the labor market as stable."

Economists noted that employment data can be particularly volatile during the summer because of difficulties adjusting for seasonal fluctuations associated with the end of the school year. Local government education employment fell by 49,600 in July, the largest decline since October 2021, contributing to a 53,000 drop in overall government payrolls.

Private-sector employment increased by 30,000, matching June’s gain. Private payroll growth has averaged 72,000 jobs per month this year, leading some economists to argue that the private-sector figures provide a better indication of underlying labor-market conditions. They expect much of the weakness in local government education employment to reverse in August.

Leisure and hospitality employment fell by 40,000, marking a second consecutive monthly decline. Restaurants and bars accounted for 26,100 of those losses. Economists attributed part of the weakness to the fading boost from the FIFA World Cup.

Retail employment also declined, falling by 19,400 jobs, with losses concentrated among warehouse clubs, supercenters and other general merchandise stores. Together, the leisure and hospitality and retail sectors reduced overall payrolls by 59,400 jobs. Both industries have experienced increased volatility in recent months.

Employment in financial activities fell by another 14,000 jobs, bringing the sector’s losses to 121,000 since its peak in May 2025. Healthcare employment rose by 22,000, but that was well below its average monthly gain of 36,000 over the past year.

Construction employment increased by 22,000, while manufacturing added 5,000 jobs. Manufacturing has added 31,000 jobs so far this year, potentially reflecting investment linked to the artificial intelligence boom. However, the share of manufacturing industries reporting employment gains fell to 50.0% in July from 56.9% in June.

The broader diffusion of job growth also weakened, with the share of industries reporting employment increases falling to 51.8% from 53.2% in June.

The labor market is also being affected by a shrinking labor supply. The Trump administration’s tougher immigration enforcement has contributed to a decline of more than 1 million people in the labor force this year, according to economists, with further reductions possible as hundreds of thousands of immigrants lose protected status.

"Since January, the labor force has fallen by 228,000 persons per month and these individuals appear to have been foreign born," said John Ryding, economic advisor at Brean Capital. "It is hard not to attribute the decline in the labor force to immigration enforcement and policies."

The average workweek remained unchanged at 34.3 hours, providing little evidence that widespread labor shortages are preventing businesses from hiring. Wage growth also moderated, with average hourly earnings rising 3.2% from a year earlier after increasing 3.4% in June.

The combination of weaker payroll growth and slower wage gains led some economists to argue that the Federal Reserve may have little reason to tighten monetary policy this year.

Financial markets reflected that shift. Investors priced in a 44% probability of a Federal Reserve rate hike in September, down from 57% before the employment report, according to LSEG data. The Fed last week left its benchmark overnight interest rate unchanged at 3.50%-3.75%.

Three members of the Fed’s policy-setting committee dissented at the meeting, preferring a quarter-percentage-point rate increase. Upcoming inflation data could further shape the debate over the central bank’s next move.

Markets reacted positively to the weaker employment figures. U.S. stocks traded higher, Treasury yields fell and the dollar weakened against a basket of major currencies.

The latest data also showed signs of strain in household employment. Household employment fell by 87,000, while the number of people working part-time for economic reasons rose by 123,000 to 4.804 million. The median duration of unemployment declined to 10.5 weeks from 11.0 weeks in June, although it remained elevated.

The labor force participation rate has now declined in six of the past seven months and stands at its lowest level since February 2021. The employment-to-population ratio, another measure of the economy’s ability to generate jobs, also continued to decline and is approaching a five-year low.

Economists estimate that the U.S. economy needs to add roughly 20,000 to 50,000 jobs each month to keep pace with growth in the working-age population. The relatively low break-even rate reflects the shrinking size of the labor force.

Despite the weak headline payroll figure, economists remain divided over the Federal Reserve’s next steps.

"We agree that the July jobs report was a bit dovish on net," said Aditya Bhave, a U.S. economist at Bank of America Securities. "But we are sticking with our call that the Fed will hike by 75 basis points this year, starting in September."

Bhave said the Federal Reserve is likely to remain more focused on inflation than the labor market, highlighting the central bank’s difficult balancing act as employment growth slows while price pressures remain a concern.