US payrolls drop 23,000 as labor force shrinks 264,000

US nonfarm payrolls fell 23,000 in July, the first negative print in the current run, while the unemployment rate dipped to 4.1 percent from 4.2 percent — a decline that masks a labor force shrinking by 264,000 workers.

"The combination of negative headline job creation and downward revisions stand in contrast to the lower unemployment rate, presenting conflicting signals for the Fed in regard to the overall health of the labor market," said Jeff Schulze, head of economic and market strategy at ClearBridge Investments.

The Bureau of Labor Statistics also revised May payroll growth down by 66,000 to 63,000 and June by 37,000 to 20,000, removing a combined 103,000 jobs from previously reported figures. Local government education shed 50,000 positions, retail trade lost 19,000 and financial activities declined by 14,000, while health care added 22,000 jobs — below its 36,000 monthly average over the past year.

The report gives the Federal Reserve room to hold rates at its September meeting, with the next CPI release due next week likely to carry more weight than the jobs data. The Fed has kept rates unchanged for five consecutive meetings since its last cut in December 2025.

Labor Force Shrinks as Participation Falls

The labor force participation rate held at 61.4 percent in July but has fallen 0.7 percentage point since January and a full percentage point since December. The employment-population ratio stood at 58.9 percent, down 0.5 percentage point since January. Baby Boomer retirements and immigrants exiting the workforce, partly tied to deportation policies, are driving the contraction, according to the source data.

Temporary layoffs rose by 153,000 to 921,000 in July, while permanent job losers held near 1.7 million. Long-term unemployment — workers jobless for 27 weeks or more — edged down to 1.8 million, still representing 25.5 percent of all unemployed. Another 4.8 million people worked part time for economic reasons, wanting full-time positions but unable to secure them.

Among demographic groups, unemployment declined for teenagers to 12.1 percent and for Hispanic workers to 4.6 percent, while rates for adult men, adult women, White, Black and Asian workers were little changed.

Wage Growth Cools to 3.2 Percent

Average hourly earnings for private-sector workers stood at $37.62 in July, up two cents from June, with annual wage growth slowing to 3.2 percent from 3.5 percent. The average workweek held steady at 34.3 hours, suggesting stable labor demand despite the payroll decline.

The three-month trend now shows a clear sequence of weakening: 63,000 jobs added in May, 20,000 in June and a loss of 23,000 in July — an average of just 20,000 per month. That compares with the 34,000 monthly average over the prior 12 months.

"Weaker job and wage growth gives the Fed some breathing room to remain patient on the inflation front and on hold with rates at the September FOMC meeting," Schulze said.

Charlie Ripley, senior investment strategist at Allianz Investment Management, said the magnitude of the payroll miss suggests the labor market may be losing momentum. "This report squarely puts the spotlight back on the employment side of the Fed's mandate," he said.

Chris Zaccarelli, chief investment officer at Northlight Asset Management, said the report shifts the debate. "Before today, many were expecting that the Fed had no choice but to raise rates in order to fight stubbornly high inflation, because the job market was so strong, but this report shows that isn't the case," he said.

The next Employment Situation report, covering August, is scheduled for September 4. Economists will watch whether July was an anomaly or the start of a broader hiring slowdown, with the July CPI release next week likely to shape the Fed's September decision more than the jobs report, according to Bill Adams, chief U.S. economist at Fifth Third Commercial Bank.

This article is for informational purposes only and does not constitute investment advice.