July brought an unexpected setback for the US labor market

The US job market took an unexpected step backward last month, shedding 23,000 jobs, according to government data released yesterday. Analysts had expected a gain of 100,000.

Public school jobs declined by 50,000. Restaurants and bars lost 26,000 workers. Retail employment fell by 19,000 as big-box stores trimmed staff, while finance shed 14,000 employees.

Economists point to the ongoing war in Iran and rising energy prices as key factors behind the economic slowdown. Still, private payrolls grew by 30,000 in July, suggesting hiring remains relatively strong.

Healthcare was the standout, adding 22,000 jobs. Construction and manufacturing gained another 27,000 combined, as the data center buildout continued to drive hiring.

Meanwhile, the unemployment rate also fell to 4.1%—the lowest level since 2025. However, the decline was driven by 264,000 people leaving the labor force.

The government also revised the number of jobs added over the previous two months downward by 103,000.

The disappointing jobs report dealt a blow to expectations for a Fed rate hike, with traders lowering the odds of a September increase to 44% and an October hike to 58.3%.

Wage growth also remained sluggish, with average hourly earnings rising 3.2% year over year, the smallest increase since May 2021.

But if next week’s data show inflation accelerating faster than wages, the Fed’s already tricky balancing act could get even tougher.