U.S. employers cut 23,000 jobs in July as labour force participation hits five-year low

The US labour market weakened unexpectedly in July, with employers cutting 23,000 jobs as a sharp drop in labour force participation raised fresh concerns about the strength of the economy and the Federal Reserve’s interest rate outlook.

The latest data from the US Labor Department showed nonfarm payrolls fell by 23,000 in July, well below economists’ expectations of an 80,000 increase. The figures for May and June were also revised significantly lower, with the economy adding 103,000 fewer jobs across the two months than previously reported.

Despite the decline in employment, the unemployment rate edged down to 4.1% from 4.2% in June. However, the improvement largely reflected people leaving the labour force rather than stronger hiring. 

About 264,000 people exited the workforce in July, pushing the labour force participation rate down to 61.4%, its lowest level in nearly five and a half years.

“The labour market appears to have slammed the brakes on new hiring,” said Christopher Rupkey, chief US economist at FWDBONDS.

“It isn’t lights out yet for the economic outlook, but the future is dim if pessimism leads to more dropouts and companies cannot get the help they need to produce the goods and services the economy needs to grow.”

The weakness was broad across several sectors. Local government education employment fell by 50,000, while retail trade jobs declined by 19,000, mainly in warehouse clubs, supercentres and other general merchandise stores.

Financial activities employment dropped by another 14,000 jobs. The sector has now lost 121,000 jobs since reaching its peak in May 2025.

Healthcare continued to add jobs, increasing payrolls by 22,000 in July. However, that was considerably below its average monthly gain of 36,000 over the past year.

Employment was little changed in construction and manufacturing.

The July decline challenges the idea of a “slow hire, slow fire” labour market, with weaker recruitment now raising concerns over whether businesses are becoming more cautious about expanding their workforce.

The employment report also shifted expectations around the Federal Reserve’s next policy move. Financial markets priced in a 43.9% chance of a rate hike in September, down from 57% before the jobs data was released, according to LSEG data.

The Fed last week kept its benchmark overnight interest rate in the 3.50%-3.75% range, although three members of its policy-setting committee dissented and favoured a quarter-percentage-point increase.

“The latest 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,” said Ellen Zentner, chief economic strategist at Morgan Stanley Wealth Management.

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

The next inflation report is therefore expected to play a key role in determining the Fed’s near-term policy direction. Treasury yields fell following the jobs report, while the US dollar weakened against a basket of major currencies.

The latest figures point to a labour market losing momentum, with weaker hiring and declining participation adding to uncertainty over the US economic outlook in the second half of 2026.