The U.S. economy unexpectedly shed jobs in July, as elevated inflation and uncertainty surrounding the economic impact of the Iran war created headwinds for employers. The report adds another data point for policymakers and investors trying to gauge whether hiring weakness is becoming more persistent even as the unemployment rate remains relatively low.

Key Findings of the July 2026 Jobs Report

The Bureau of Labor Statistics reported on Thursday that employers cut 23,000 jobs in July. That figure fell well short of the estimate from economists polled by LSEG, who had projected a gain of 80,000 jobs.

The unemployment rate dipped to 4.1%, below the consensus estimate of 4.3%.

Revisions to payroll numbers for the prior two months were significant. May's figure was revised downward by 66,000, from a previously reported gain of 129,000 to 63,000. June's report was revised down by 37,000, from a gain of 57,000 to 20,000. Combined, employment for May and June was 103,000 jobs lower than initially reported.

Sector Breakdown: Job Gains and Losses

Private payrolls added 30,000 jobs in July, far below the 78,000 estimate from economists surveyed by LSEG. June's private payroll growth was revised downward from 49,000 to 30,000.

Government payrolls contracted by 53,000 jobs in July. The sector's previously reported increase of 8,000 jobs in June was revised to a loss of 10,000.

The manufacturing sector added 5,000 jobs in July, exceeding the LSEG economist estimate of 4,000. June manufacturing data was revised upward from a gain of 3,000 to 11,000 jobs.

Retail shed 19,400 jobs in July. Declines at supercenters and general merchandise retailers (-21,300) and gas stations (-4,600) outweighed gains at sporting goods, hobby, music, book, and other retailers (+9,500). Retail employment has shown little net change over the past 12 months.

Financial activities lost 14,000 jobs in July, driven by losses in credit intermediaries (-8,800) and insurance carriers (-6,700). Employment in the financial sector now stands 121,000 jobs below its May 2025 peak.

Healthcare added 22,000 jobs in July, representing a slowdown from the average monthly gain of 36,000 over the trailing 12 months. Ambulatory healthcare services accounted for much of the increase (+18,100).

Workforce Indicators

The number of long-term unemployed — those jobless for 27 weeks or more — edged lower to 1.8 million, though it has changed little over the year. This group accounted for 25.5% of all unemployed individuals in July.

The number of people working part-time for economic reasons held roughly steady at 4.8 million. These individuals would have preferred full-time employment but were either working reduced hours or unable to secure full-time positions.

The labor force participation rate stood at 61.4% in July, little changed from the prior month. Since January, the participation rate has declined by 0.7 percentage points.

Average year-over-year earnings growth was 3.2% in July, below the 3.5% LSEG estimate. June's figure was revised downward from 3.5% to 3.4%.

Expert Reactions

Jeffrey Roach, chief economist at LPL Financial, described the labor market as "experiencing an orderly slowdown, and labor stress indicators remain historically low," suggesting the July report could boost investor risk appetite.

"However, the decline in the unemployment rate will complicate the Fed's decision process because the economy appears to be at full employment. But, the broad slowdown in hiring will add support for those arguing to keep rates unchanged at next month's Fed meeting," Roach added.

Lindsay Rosner, head of multi-sector fixed income investing at Goldman Sachs, remarked: "History doesn't repeat, but sometimes it rhymes. For the third time in as many years, July jobs data saw a mid-summer loss of momentum. While incoming inflation data will be the ultimate arbiter, slowing jobs growth helps support a September hold."

Ellen Zentner, chief economic strategist at Morgan Stanley Wealth Management, noted that the "weak payrolls print may ease the pressure on the Fed to raise rates at its September meeting, but next week's inflation data will still likely be the deciding factor."

"If those numbers come in hotter than expected, a cooler labor market may not be enough to quiet the calls for hikes inside the Fed, or lower expectations outside of it," Zentner added.

Implications for Interest Rates

Traders see a close call for the Federal Reserve's September decision on whether to hold or hike rates, with the July report shifting the odds.

The CME FedWatch tool indicates a 55.9% probability that the Fed will hold rates steady at the current target range of 3.5% to 3.75%, up from 45% a day earlier. The probability of a 25-basis-point hike next month fell to 44.1% from 55% the prior day.

The tool also shows the Fed ending the year with one 25-basis-point hike as the most likely outcome, with a 44.9% probability — compared with a 26.8% chance of two such hikes and a 23.6% chance of rates remaining unchanged. That leaves the next inflation release as an important near-term reference point for how much weight policymakers place on softer hiring versus still-elevated prices.

Market Response

Markets opened modestly higher following the July jobs report. The benchmark S&P 500 Index rose approximately 0.4% in morning trading, while the Dow Jones Industrial Average gained 0.13% and the Nasdaq Composite advanced 0.96%.