United States employers cut 23,000 jobs in July, an unexpected reversal that signaled a weaker labor market and prompted investors to reduce expectations for a Federal Reserve interest-rate increase in September. The unemployment rate edged down to 4.1%, but government data released Friday showed that the decline reflected fewer people participating in the workforce rather than stronger hiring.
The Labor Department also revised May and June payrolls down by a combined 103,000 jobs. Economists surveyed before the release had expected an increase of about 87,000 positions, according to Axios. The July contraction was the first monthly job loss since February, adding weight to evidence that employment growth has slowed despite historically low layoffs.
Local government education accounted for a loss of 50,000 jobs, while restaurants and bars shed 26,000 and retail trade lost 19,000. Financial activities declined by 14,000. Those decreases were partly offset by gains of 22,000 in health care, 22,000 in construction and 5,000 in manufacturing, according to figures reported by the Associated Press and Axios.
The unemployment rate fell because 264,000 people left the labor force, pushing the participation rate to 61.4%, its lowest level since February 2021. Employers have added an average of 61,000 jobs a month so far this year, compared with 9,700 during 2025. Analysts say an aging population, tighter immigration and productivity gains are reducing both the supply of workers and companies' need to recruit.
Financial markets treated the weak report as a reason for the Fed to move cautiously. The S&P 500 ended 0.6% higher at a record 7,757.64, the Nasdaq gained 1.3% and the Dow rose 0.3%. The two-year Treasury yield, which closely reflects policy expectations, fell after the release, while technology shares helped lead the equity advance.
The policy outlook remains complicated because higher energy costs have kept inflation above the Fed's target. Investors will focus next on July consumer-price data, expected in the coming week, for evidence about whether price pressures are easing. The employment report may lessen pressure for a September rate increase, but inflation readings are likely to determine the central bank's next step.
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