US July jobs report shows payrolls down, September FOMC hike bets fade

2026-08-08

US nonfarm payrolls fell by 23,000 in July, the Labor Department said on the 7th, confounding market expectations. Gains for May and June were also revised down by a combined more than 100,000, dampening expectations for an early rate hike.

Signs of a sharper slowdown in hiring

The main drag on employment was the education segment of state and local government, where payrolls fell by nearly 50,000. While the decline appeared to be a temporary factor tied to the summer school holiday, jobs also fell in leisure and hospitality, including restaurants, and in retail. Private payrolls rose by only 30,000. Demand for builders, electricians and others remains strong on the back of data center construction for artificial intelligence, but the pace of private-sector job recovery has slowed since March.

Markets revise rate-hike bets

Financial markets quickly scaled back expectations of an early rate hike by the US Federal Reserve. In FedWatch, which uses US interest-rate futures to gauge policy, the view that the Federal Open Market Committee would leave the policy rate unchanged at its Sept. 15-16 meeting rose above 50%, topping expectations for a hike. The FOMC decided to hold rates at its late-July meeting, but Cleveland Fed President Beth Hammack and three other regional Fed presidents cast dissenting votes, arguing for a 0.25 percentage point increase.

Inflation and wages also under scrutiny

The Fed has not changed its stance of watching price trends as well as employment. Speaking on the 5th, Governor Lisa Cook, who voted to keep rates unchanged at the July meeting, said the risks of a pickup in inflation were greater than the risks of a deterioration in employment, and that she would support a rate hike if needed. Markets are focusing on the July consumer price index, due out on the 12th.

Average hourly earnings in July rose 3.2% from a year earlier, but the pace slowed 0.3 percentage point from June to the lowest in about five years. Given inflation in the mid-to-late 3% range, real wages likely declined. The savings rate also stood at 2.7% in June, the lowest since 2.2% in June 2022. If real wage growth remains weak, consumer spending, which grew at an annualized rate of more than 3% in the April-June quarter, could also be affected.

Unemployment rate falls to 4.1%

The unemployment rate in July fell 0.1 percentage point from the previous month to 4.1%, the lowest in about a year since June last year. That may seem inconsistent with the decline in jobs, but the bigger factor is the effect of US President Donald Trump's immigration restrictions and retirements by the baby-boom generation, which have made it harder for the number of job seekers to rise. The labor force participation rate was 61.4%, the lowest since February 2021, during the coronavirus pandemic.

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