US payrolls unexpectedly fall in July, cooling September rate hike bets

The US economy lost 23,000 jobs in July, a surprise that has tempered market expectations for a Federal Reserve interest rate hike next month. The Labor Department's report also showed that job gains for May and June were revised down by a combined 103,000 positions, painting a softer picture of the labor market than previously thought.

The unemployment rate did fall to 4.1% from 4.2% in June, but for a less encouraging reason: 264,000 people left the labor force. This pushed the participation rate down to 61.4%, a near 5-1/2-year low. Economists noted that summer months often bring seasonal adjustment difficulties, and pointed to a decline in local government education jobs as a major factor. The leisure and hospitality sector also lost jobs for a second straight month, which analysts attributed to the fading boost from the FIFA World Cup.

Despite the headline drop, economists cautioned against reading it as a sign of abrupt deterioration. "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."

Financial markets reacted by pricing in a 43.9% chance of a September rate hike, down from 57% before the data release. The Fed recently held its benchmark rate in the 3.50%-3.75% range, though three policymakers dissented in favor of a quarter-point increase. Stocks traded higher, Treasury yields fell, and the dollar slipped against major currencies.

Details from the report showed local government education employment dropped by 49,600, the most since October 2021, contributing to a 53,000 decline in overall government payrolls. Private payrolls, excluding government, rose by 30,000. Leisure and hospitality lost 40,000 jobs, with restaurants and bars shedding 26,100. Retail trade cut 19,000 positions, and financial activities lost 14,000 jobs, down 121,000 since peaking in May 2025.

Healthcare added 22,000 jobs, below its recent monthly average, while construction gained 22,000 and manufacturing rose by 5,000. The average workweek held steady at 34.3 hours, but wage growth slowed to 3.2% year-on-year from 3.4% in June.

The household survey was also mostly weak. Household employment fell by 87,000, and the number of people working part-time for economic reasons jumped by 123,000 to 4.804 million. The median duration of unemployment eased to 10.5 weeks from 11.0 weeks, though it remains elevated. The participation rate has now declined in six of the past seven months.

"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," said Christopher Rupkey, chief U.S. economist at FWDBONDS.