US payrolls fall by 23,000 in July, markets trim Fed rate hike expectations

Payrolls see first monthly drop in years

The Bureau of Labor Statistics reported that nonfarm payrolls decreased by a seasonally adjusted 23,000 positions in July. This follows a downwardly revised job loss of 20,000 in June, defying economists’ expectations for an increase of 83,000 roles.

Significant downward revisions were also made to previous data, with May and June’s payroll gains reduced by a combined 103,000 jobs.

Despite the setback in overall employment, the unemployment rate edged slightly lower to 4.1% from June’s 4.2%. This decrease primarily reflected a decline in labor force participation, which slipped to 61.4%. This represents the lowest participation rate in over five years.

The weak official reading was mirrored by private sector data. According to ADP, private nonfarm employment rose by 44,000 in July, well below forecasts for a 75,000 job gain.

Job losses widespread but health care holds steady

A broad range of industries recorded employment declines in July, with losses seen across education, retail, and financial services.

Local government education shed 50,000 jobs after a year of relative stability. Meanwhile, the retail trade sector lost 19,000 jobs, including 21,000 cutbacks at warehouse clubs, supercenters, and general merchandise stores, and 5,000 fewer positions at gasoline stations. These decreases were partially offset by the addition of 10,000 jobs at sporting goods, hobby, and book retailers.

Financial activities continued to struggle, with 14,000 fewer jobs overall. The bulk of the losses came from credit intermediation and related services, which reduced staff by 9,000, while insurance carriers and related businesses trimmed another 7,000 roles. Financial services employment has now declined by 121,000 since peaking in May 2025.

Health care emerged as one of the few resilient sectors, adding 22,000 jobs. However, this represented a slowdown compared to the 36,000 monthly average gain over the previous year. Ambulatory health care services contributed 18,000 new positions to the sector.

Subdued wage growth accompanies soft jobs data

Wage growth remained muted in July. Average hourly earnings for all private-sector employees were little changed at $37.62, increasing by just two cents month-over-month and 3.2% compared to a year earlier. Production and nonsupervisory workers received a slight pay bump, with hourly earnings rising four cents to $32.40.

Mixed signals as analysts assess labor market trend

Contrasting with government figures, analysis by the Bank of America Institute indicated that hiring may have strengthened in July, based on deposit account data. The study found that employment gains were led by lower-income households, whose after-tax wage growth outpaced that of higher-income workers for the first time since December 2024.

Alongside strong job growth, job-to-job movements have disproportionately boosted pay growth for lower-income households, according to the Bank of America Institute.

These conflicting signals illustrate how rapidly the US labor market’s health remains open to interpretation, with different sources offering varying views on hiring momentum.

Mini dictionary: Bank of America Institute, a research group within Bank of America that analyzes economic, consumer, and labor market trends using payment and transaction data.

Fed rate hike expectations ease, markets rally

The employment report comes at a critical juncture for the Federal Reserve, with policymakers debating the timing and necessity of further interest rate increases. Several officials have signaled that rates could rise as early as September if inflation does not slow sufficiently.

The Federal Open Market Committee voted 9-3 last week to keep its key interest rate unchanged. In the wake of the latest jobs report, traders sharply reduced bets on a near-term rate hike. CME Group’s FedWatch tool showed the probability of a September interest rate increase falling to 44%, and the odds of an October hike easing to 58.3%.

Financial markets responded positively to the softer jobs data. US equity futures climbed, with Dow Jones Industrial Average futures up nearly 200 points, and Treasury yields dropped as investors adjusted their expectations for future Fed tightening.