U.S. Jobs Slide 23,000 in July, Downward Revisions Press Fed to Hold Rates

The U.S. labor market unexpectedly contracted in July, upending expectations for a steady gain and sharply lowering the odds that the Federal Reserve will raise interest rates at its September meeting.

Nonfarm payrolls fell by 23,000 jobs last month, the Labor Department reported Friday, against a Reuters poll of economists that had forecast an increase of 80,000. The prior two months were also revised sharply lower, with a combined 103,000 fewer jobs added in May and June than previously estimated, according to CBS News.

The unemployment rate ticked down to 4.1% from 4.2% in June, but for a reason that underscored the labor market’s weakness: the labor force participation rate fell to a near five-and-a-half-year low of 61.4%, as 264,000 people left the workforce, the Business Standard reported.

Market expectations for a quarter-point rate hike at the Fed’s Sept. 15-16 meeting tumbled to about 44% on Friday, according to CME FedWatch, down from 55% the prior session and 67% a week ago. The probability that the central bank will hold rates steady rose to 56%, from 45% a day earlier, the Star-Advertiser reported, citing CME data.

“The chances of holding just went up pretty significantly today,” Cory Stahle, a senior economist at Indeed Hiring Lab, told CBS News. “What we see in the jobs report maybe says that the Federal Reserve, at the very least, might have to think about the timing of a potential rate hike, if not think about some rate cuts on the table as well.”

Fed Chair Kevin Warsh has offered investors little forward guidance on monetary policy, the Straits Times reported, leaving markets to focus on economic data. The Fed last week left its benchmark overnight rate in the 3.50%-3.75% range, with three dissenting members preferring a quarter-point hike, according to the Business Standard.

**Stocks rally, dollar slides**

Stocks rallied on the news. The S&P 500 rose 0.6% to close at a record 7,757.64, capping the biggest weekly gain since mid-April. The Nasdaq Composite climbed 1.3% and the Dow Jones Industrial Average added 0.3%, the Straits Times reported.

The dollar fell sharply against major currencies. The dollar index slid 0.44% to 99.50, on track for a second consecutive weekly loss. The dollar weakened 0.57% against the yen to 157.56, and the euro gained 0.39% to $1.1568, according to the Star-Advertiser. U.S. Treasury yields fell, with the two-year note down 4.2 basis points to 4.245%.

“It certainly changed the dynamic of the predicting markets about monetary policy,” Art Hogan at B. Riley Wealth Management told AFP, as reported by Channel NewsAsia. He added that lower Treasury yields “takes away a bit of a headwind for equities.”

“You probably have to lower rates to kind of stimulate job growth, but if you lower rates, you’re going to also stimulate inflation,” Tom Siomades, chief market economist at AE Wealth Management, told the Straits Times. “So you’re kind of in a pickle at this point, and yet the market’s just taken off because earnings have been stellar.”

**Sector breakdown and seasonal quirks**

The job losses were concentrated in a few sectors. Local government education employment dropped by 49,600, the most since October 2021, contributing to a 53,000 decrease in overall government payrolls, the Business Standard reported. Economists attributed the slump to seasonal adjustment difficulties, expecting it to reverse in August.

Leisure and hospitality lost 40,000 jobs for a second straight month, with restaurants and bars shedding 26,100 positions. The Trump administration earlier blamed the weakness on federal downsizing and layoffs in World Cup hospitality, CBS News reported. Retail trade fell by 19,000 jobs, mostly at warehouse clubs and general merchandise stores. Financial activities shed 14,000 jobs, down 121,000 since peaking in May 2025.

On the positive side, healthcare added 22,000 jobs, though that was well below the recent monthly average of 36,000. Construction added 22,000 and manufacturing rose 5,000. The share of industries reporting job growth slipped to 51.8% from 53.2% in June.

Wage growth slowed to 3.2% year-over-year from 3.4% in June. The average workweek held at 34.3 hours. The number of people working part-time for economic reasons rose by 123,000 to 4.8 million, the Business Standard reported.

“This is the third summer in a row that we have seen unexpected weakness in the labor market,” Stephen Stanley, chief US economist at Santander US Capital Markets, told the Business Standard. “Policymakers broadly see the labor market as stable.”

**Earnings season and other crosscurrents**

A strong earnings season helped drive stocks higher. Of the 436 S&P 500 companies that had reported through Friday, 85.1% topped analyst expectations, well above the 68% average since 1994, according to LSEG data cited by the Straits Times.

Signs of progress toward a peace deal in the Iran war have helped cool oil prices and ease inflation worries, the Straits Times reported. But oil prices turned higher Friday amid conflicting statements from officials, with Channel NewsAsia noting that analysts said prices were unlikely to fall back below $70 a barrel without concrete progress.

The combination of a softening labor market, elevated inflation, and geopolitical uncertainty leaves the Fed in a difficult position, economists said. “It isn’t lights out yet for the economic outlook, but the future is dim if pessimism leads to more dropouts,” Christopher Rupkey, chief US economist at FWDBONDS, told the Business Standard.

Bank of America economists said they are sticking with their call for a 0.75 percentage point rate hike this year, starting in September, arguing the Fed will remain more focused on inflation than labor, according to CBS News.

Next week’s Consumer Price Index report, due Aug. 12, is forecast to show annual inflation eased to 3.4% from 3.5% in June, according to FactSet data cited by CBS News. That reading could sharpen the debate on the near-term monetary policy outlook.