The U.S. economy unexpectedly shed jobs in July and previously reported job gains for the prior two months were revised sharply lower, tempering financial market expectations for an interest rate hike from the Federal Reserve next month.
Job growth posted a sharp, unexpected contraction in Jul-26, as nonfarm payrolls fell by -23K following a downwardly revised +20K gain in Jun-26, substantially below consensus expectations (+80K). The downward revisions to prior months further softened the backdrop, with May and June figures marked down by a combined -103K jobs. Job losses were concentrated in local government education and retail trade, particularly within general merchandise retailers, fuel dealers, and continued declines in financial activities. Meanwhile, most major industries, including construction, manufacturing, and business services, recorded flat employment levels, leaving health care as the sole notable driver of hiring.
Despite the weaker job growth, the unemployment rate edged down to 4.1% (Jun-26: 4.2%). However, this decline was driven entirely by labour force reduction rather than robust employment creation. Total employment contracted by -87K, while the overall civilian labour force shrank by -264K as workers exited the job search. Consequently, the labor force participation rate dropped to 61.4%, marking its lowest level since early 2021, highlighting underlying weakness in labor supply and supply-side engagement
The latest labour market data confirms a clear loss of labour market momentum. The combination of payroll contractions, sharp negative revisions, and falling labour participation signals slowing both labour demand and supply. MBSB notes that the growing fragility effectively reduces the chances for policy tightening as the Fed would have to consider balancing between inflationary pressures and addressing downside risks to the job market.
