The U.S. labor market demonstrated continued weakness for the second consecutive month in July, with the economy losing 23,000 jobs according to the Bureau of Labor Statistics (BLS) data released Friday morning. This figure was significantly below economists' expectations of 80,000 job gains, and represented a decline from June's revised figure of 57,000 jobs (originally reported as 20,000). The unexpected contraction signals further cooling in employment conditions that economists had largely expected to show payroll growth during the month. As per ClearBridge Investments, the July payroll release "disappointed across the board reversing the trend of this year's positive labor market momentum." The unemployment rate fell slightly to 4.1% from 4.2% in June, though this decline came despite weaker hiring conditions because another 264,000 people left the labor force, pushing the participation rate to a near 5-1/2-year low of 61.4%. The employment report revealed that job growth averaged 20,000 per month over the past three months, down from 77,000 per month in the three months through June. Economists noted that "this is the third summer in a row that we have seen unexpected weakness in the labor market," with Stephen Stanley from Santander US Capital Markets explaining that "policymakers broadly see the labor market as stable."
The disappointing jobs data prompted investors to dial back expectations of further monetary tightening by the Federal Reserve, with financial markets priced in a 43.9% chance of a US central bank hike in September, down from 57% before the jobs report according to LSEG data. US stock futures climbed and US Treasury yields fell on Friday, while the dollar slipped against a basket of currencies. Nasdaq 100 futures led gains, rising 0.8%, while S&P 500 futures advanced 0.4% and Dow Jones Industrial Average futures were up around 110 points, or 0.2%. The moves came after a weak session on Wall Street on Thursday, when higher oil prices weighed on investor sentiment. Spot gold jumped 2.8% to $4,360.17 an ounce, supported by expectations that lower borrowing costs could weaken the US dollar and enhance the appeal of non-yielding assets such as bullion. Crude oil prices eased, with West Texas Intermediate crude falling 0.6% to $76.85 per barrel and Brent crude declining 0.7% to $81.90 a barrel. Bitcoin rose nearly 2% to around $65,200 as traders lowered their expectations for another rate increase. US stock markets opened higher on Friday after unexpected job losses, with the S&P 500 rising 25.2 points, or 0.33%, to 7735.18 and the Nasdaq Composite rising 186.3 points, or 0.71%, to 26534.66 at the opening bell, while the Dow Jones Industrial Average fell 35.8 points, or 0.07%, to 53849.26.
The job losses were concentrated in specific sectors, with local government education employment dropping 49,600 last month, the most since October 2021, contributing to a 53,000 decrease in overall government payrolls. Leisure and hospitality employment decreased by 40,000, losing jobs for a second straight month, with restaurants and bars reducing payrolls by 26,100. The retail trade sector lost 19,000 jobs, the bulk of them at warehouse clubs, supercenters, and other general merchandise stores. Employment in financial activities fell further, shedding 14,000 jobs, bringing total employment losses to 121,000 since its recent peak in May 2025. However, the Trump administration highlighted gains in sectors it has sought to promote through its tariff policy, noting that construction companies added 22,000 jobs and factories increased employment by 5,000. Healthcare payrolls increased 22,000, though this was well below the monthly average of 36,000 over the past year. The share of industries reporting job growth fell to 51.8% from 53.2% in June, while average hourly earnings for private-sector workers were almost unchanged at $37.62 in July, with wages up 3.2% compared with a year ago, though this represents a slowdown from 3.4% previously. Revisions to the previous two months removed 103,000 jobs from earlier estimates, suggesting that labor demand had weakened more than initial reports indicated.
Despite the weak employment data, several Federal Reserve officials have maintained their hawkish stance on monetary policy, with futures markets flipping the odds of a rate hike at the September 15-16 Federal Open Market Committee meeting from likelier-than-not to a worse-than-even chance. The Fed last week left its benchmark overnight interest rate in the 3.50%-3.75% range, with three members of the Fed's policy-setting committee dissenting, preferring a quarter-percentage-point hike. As per Economic Times, Philadelphia Fed leader Anna Paulson, who holds an FOMC vote, said in an essay that she has an "open mind" on what the Fed will need to do, and noted in a TV interview the response "could be higher rates" or "same rates for longer." New York Fed President John Williams stated that "my forecast personally is for inflation to come down in the second half of this year and come down further next year," but "if the economy is not on a trajectory that will bring inflation back down to 2% ... it would absolutely be appropriate to act." Fed Governor Lisa Cook said she "would support an increase, if it becomes necessary, to bring inflation down." The three dissenters at the FOMC meeting argued that policy is simply not delivering the amount of restraint needed to bring price pressures back under control, with leaders of the Kansas City and St. Louis Fed banks also expressing support for higher rates. However, Richard Clarida from Citibank noted that "Hikes are unlikely and we continue to think the next move is a cut-with a base case for this to be delivered in October," as softer labor market data and upcoming cooler inflation means Fed officials will need to balance upside risk to inflation with downside risk to employment.
The employment data revealed concerning trends in labor force participation, with the participation rate declining in six of the past seven months and reaching the lowest level in 50 years excluding COVID. The labor force participation rate remained at 61.4% in July, down 0.7 percentage points since January. A quarter of a million people left the labor force last month, with household employment dropping 87,000 and the number of people working part-time for economic reasons increasing 123,000 to 4.804 million. Therefore, the fall in the unemployment rate was caused by disengagement rather than for any positive reason. The median duration of unemployment fell to a still-elevated 10.5 weeks from 11.0 weeks in June, while the average workweek held at 34.3 hours. However, wage growth slowed, increasing 3.2% year-on-year after rising 3.4% in June. About 264,000 Americans stopped participating in the job market, causing the share of people either employed or actively looking for work to fall to 61.4%, the lowest reading since February 2021. Christopher Rupkey from FWDBONDS warned that "it isn't lights out yet for the economic outlook, but the future is dim if pessimism leads to more dropouts and companies cannot get the help they need to produce the goods and services the economy needs to grow." The current labour market has led economists to characterize it as a "no hire, no fire" environment, where employers have created an average of 61,000 jobs each month so far this year, an improvement from 9,700 a month in 2025.
