US Economy Sheds 23,000 Jobs in July as Labor Market Weakens, Fed Rate Hike Odds Plunge

The US economy unexpectedly lost 23,000 jobs in July, the Bureau of Labor Statistics reported Friday, falling far short of economist forecasts for an 80,000 gain. The surprise decline marks a significant deterioration in the labor market and has sharply reduced expectations for a Federal Reserve interest rate increase in September.

The unemployment rate edged down to 4.1% from 4.2%, below the 4.2% estimate, though this occurred alongside a decline in the labor force participation rate to 61.4% from 61.5%. Average hourly earnings rose just 0.1% month-over-month, missing expectations of 0.3% and down from the prior month's 0.3% gain. Year-over-year wage growth slowed to 3.2% from 3.5%.

The report revealed broad weakness across employment sectors. Private payrolls increased by only 30,000, well below the 82,000 estimate, while government employment fell by 53,000. The underemployment rate held steady at 7.9%. Manufacturing added 5,000 jobs, slightly above expectations.

Adding to concerns, the BLS revised previous months sharply lower, subtracting 103,000 jobs from May and June combined. May payrolls were revised down from 129,000 to 63,000, while June was cut from 57,000 to 20,000. The three-month average change in nonfarm payrolls dropped to 20,000 from a previously revised 77,000.

Following the release, interest rate futures markets dramatically reduced the probability of a September Fed rate hike. Kalshi traders now price a 62% chance of no policy change versus 34% odds for a 25 basis point increase. The weak data fuels skepticism about further monetary tightening, though analysts note it does not completely eliminate the possibility of future rate increases.

US equity futures advanced following the report, as investors interpreted the softer labor data as reducing pressure on the Federal Reserve to continue its tightening campaign. The employment snapshot suggests the labor market may be facing mounting challenges after an extended period of strength.