Jobs growth stumbles in July, reinforcing Fed patience

Executive summary

Surprisingly, U.S. payrolls lost 23,000 in July, badly missing the consensus expectation for job growth of 80,000. Moreover, the June and May tallies were revised lower by 103,000 combined, pulling down the six-month average to 44,333 from 74,800.

It was underscored by a cooling within the details, as the unemployment rate (to 4.1%) and the pace of wage growth both dipped. Yet, hours worked were unchanged and private employers added 30,000 jobs, though the industry-level hiring mix was uneven, marked by another unusually large drop within leisure & hospitality.

Ultimately, this sluggishness reflects the ‘one foot on the gas, one foot on the brake’ dynamics within the U.S. economy we’ve been chirping about for the past few months. It also reinforces our view that the Federal Reserve (Fed) will stay on hold in the near term. That said, there’s a lot more data – including the key inflation metrics and another jobs report – ahead of the next rate-decision meeting in mid-September.

Payroll trends – Big negative surprise by local government

Service-providing industries hired a paltry 5,000, while goods producers added 25,000 workers. Private payrolls rose by 30,000, knocking the six-month average down to 54,200 from 79,200 (after revisions).

The biggest change during the months was a loss of 53,000 government positions, which were mostly concentrated on the local level (-57,000), although the federal government shed 3,000 workers. The bulk of the losses were local education, slicing 57,000 positions, which is unusual for this time of the year—essentially when schools have historically added jobs. This marks the first July job loss for the subindustry since 2019 and the largest July decline since 2011. That stands in sharp contrast to the prior 20 years, when local education payrolls increased by nearly 11,000 jobs on average each July.

A review of the major industry trends

The overall trend of hiring by the major industries appeared considerably lighter again in July. The two notable exceptions of construction and profession & business services, which punch well-above their 24-month averages.

Leading the pack was health care, which accounted for 90% of the hiring within education & health services industry group during the month. Hereto, health care hired 23,000 workers in July, roughly half of its 24-month average of 57,000.

Construction added 22,000 workers, the most in six months. Although all the main subindustries hired more workers in July, the bulk of them (15,400) were within specialty trade contractors, such as those involved in foundations & structures and installing building equipment like electrical, plumbing, and HVAC.

Similarly, the hiring within profession & business services was clustered in company management (aka middle management), which hired about 8,000 – the most in almost three years. Also, Temporary Help Services, which is categorized within profession & business services, added 3,400, extending its hiring streak to seven months – matching its longest span in five years.

On the downside, leisure & hospitality remains exceptionally weak as restaurants and bars lost 26,100 jobs, cutting payrolls for the second straight month. Again, that seems out of step with the private sector reports we’re seeing, especially surrounding World Cup. Furthermore, it’s unusual to have back-to-back occur during the summer months.

Jobless rate fell, while hours worked were steady

The unemployment rate slipped by 0.1 to 4.1% and has steadily declined since it jumped to 4.5% in November 2025. It’s now just above the pre-pandemic 3-year average of 4.0%, which remains low compared to the historical average of 5.7% since 1948.

The broader underemployment rate (U-6) held steady at 7.9% in July. That’s roughly in-line with the pre-pandemic 3-year average of 7.8% and has declined sharply since hitting 8.7% in November 2025. 

Part of the decrease in the unemployment and underemployment rates has been significant drop in the labor force, which declined for the 11th time in the past 24 months. The labor force has shrunk by 1.3 million workers, or -0.8%, in the past year. 

Average weekly hours worked was 34.3, unchanged for the fourth month in a row. It remains a tick below the pre-pandemic average of 34.4. Manufacturing hours worked were also steady, at 40.4, while overtime hours fell by a tick to 3.1 from 3.2.

Average hourly earnings rose by 0.1% month over month, matching the coolest pace in 15 months and well below the pre-COVID three-year average of 0.26%. Wages for all workers grew 3.2 % from a year ago, which remains above the pre-pandemic average of 3.0%. 

Wages for rank & file workers—officially known as production & nonsupervisory employees—also rose 0.1% during the month, cooling the annual pace steady at 3.2%, which is also well above the pre‑pandemic 3.0% average.

Our take

here’s no denying that July’s employment report was weak. Although the primary drag came from local education payrolls on the government side, private payrolls added just 30,000 and the six-month average slowing to 54,200 from above 75,000 over the prior three months. 

More broadly, hiring across most industries remained subdued, hours worked were unchanged, and wage growth cooled to one of its slowest monthly gains in over a year, pointing to a labor market that remains stable but is clearly losing momentum. Moreover, the unemployment rate was saved in large part by a rapidly shrinking labor force. 

Collectively, this data point to a labor market that remains fundamentally stable but is clearly losing momentum, with slower hiring, softer wage pressures, and declining labor force participation all suggesting diminished labor demand.

From an inflation standpoint, this is a constructive development that should allow the Fed to maintain a patient approach. Despite markets pricing in a more hawkish policy path recently, we remain solidly in the camp that the Fed will stay on hold over the near term. However, there’s a lot more data before the Fed meeting on September 16th, including the three key inflation metrics along with the August jobs report and other supplementary employment data. 

Alas, the Iran situation remains a huge wildcard and status of the Strait of Hormuz will deeply influence the price of U.S. crude oil, which is ticking upward once again. In turn, a meaningful resurgence of inflation could box-in the Fed, forcing a response that they appear loath to take.

Bottom line

The July employment report reflects an economy that continues to expand, albeit inconsistently, consistent with our ‘one foot on the gas, one foot on the brake’ outlook. While the sluggish labor market should help ease inflation concerns and support the Fed’s patient stance, several key inflation reports and the August jobs data remain critical ahead of the September policy meeting. Nevertheless, rising geopolitical risks surrounding Iran and the Strait of Hormuz could push energy prices higher, potentially reigniting inflation pressures and complicating the Fed’s path forward.