US loses 23,000 jobs in July; Fed rate hike in September now less likely

The US economy unexpectedly shed 23,000 jobs in July, marking a sharp reversal in the labor market and complicating the Federal Reserve's monetary policy decisions, according to data released Friday by the Bureau of Labor Statistics. Forecasters had predicted job creation near 80,000 to 100,000. The report also included significant downward revisions: May and June payrolls were reduced by a combined 103,000 jobs, signaling sustained weakness in employment growth over the summer months.

The headline unemployment rate fell to 4.1 percent from 4.2 percent, but economists note this decline reflects labor force withdrawal rather than job gains. Approximately 264,000 people left the labor force in July, meaning they are no longer working or actively seeking employment. Labor force participation dropped to 61.4 percent—its lowest level in five years, and excluding pandemic impacts, the lowest in five decades. Job losses were concentrated in local government education (50,000), leisure and hospitality (40,000), retail trade (19,000), and financial activities (14,000). Healthcare added 22,000 jobs. Average hourly wage growth slowed to 3.2 percent year-over-year, the smallest annual increase since May 2021.

The weak labor market data has significantly reduced expectations for a Federal Reserve interest rate increase in September. CME FedWatch tracking shows the probability of rates remaining unchanged rose to 56 percent on Friday, up from 45 percent the previous day. Analysts attribute this shift to the unexpected employment contraction. The Fed maintains a dual mandate to maximize employment while controlling inflation, which continues to run above its 2 percent target at approximately 3.5 percent annually. Economists and market participants now expect the central bank to hold its benchmark rate steady at 3.50 to 3.75 percent, the level set in the previous month.

The jobs report carries political implications as well, occurring less than three months before US midterm elections. The Trump administration highlighted gains in manufacturing (5,000 jobs) and construction (22,000 jobs), attributing this to tariff and trade policies, while the White House spokesman noted that government payrolls continued to decline significantly. However, data showed employment among native-born US citizens fell by 720,000 over the past 12 months, a figure the administration did not address. Stock markets responded positively to the weak jobs data, as investors interpreted it as reducing pressure for near-term interest rate increases.