U.S. employers unexpectedly shed jobs as unemployment rate falls

The participation rate — the share of the population that is working or looking for work — fell to 61.4 per cent, which excluding the pandemic was the lowest since the 1970s. Photo by Dylan Hollingsworth/Bloomberg via Getty Images

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United States employers unexpectedly cut jobs in July and hiring in the prior two months was revised lower, suggesting the labour market is weaker than previously thought after surprising strength earlier this year.

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Nonfarm payrolls decreased 23,000 last month following a combined 103,000 downward revision to the May and June figures, Bureau of Labor Statistics data showed Friday. The unemployment rate fell to 4.1 per cent as labour force participation continued to slide, and wage growth slowed.

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The report suggests the labour market may be starting to falter amid rising prices and uncertainty from the Iran war, despite recent data showing strength in consumer spending and business investment. The data could also prompt the Federal Reserve to delay interest-rate increases as officials weigh inflation against risks to employment.

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“We thought that only an outsized move to the downside would shake the Fed’s thinking,” said Christopher Hodge, the chief U.S. economist at Natixis North America. “This print was indeed such an outsized move. There has been very little inflationary impulse from the labour market previously, but now policymakers must be on guard for a more significant slowdown in jobs.”

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U.S. stocks opened higher and Treasury yields fell as investors reduced bets on a Fed rate hike in September. Still, upcoming reports on consumer prices — including data for July next week — could ultimately decide the Fed’s course of action next month.

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The decline in payrolls was driven by cuts in government, leisure and hospitality and retail trade. Private-sector payrolls rose by 30,000 for a second month, led by healthcare and social assistance.

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Local government employers shed nearly 60,000 jobs, almost entirely in education, which can be volatile in the summer as many teachers fall off of payrolls before returning again as the school year begins. Federal government payrolls also fell.

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Leisure and hospitality employment declined to the lowest level in almost a year as restaurants and bars shed staff, suggesting the FIFA World Cup that ended July 19 didn’t provide the boost to payrolls many forecasters had anticipated.

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The report comes as high-profile companies announced layoffs throughout the month including Microsoft Corp., Uber Technologies Inc. and Visa Inc. Payrolls in the financial activities sector, a key employer of white-collar workers seen as among the most vulnerable to artificial intelligence adoption, fell to the lowest level in four years.

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Manufacturing and construction payrolls, however, continued to climb. Many economists have pointed to the data-centre buildout as a possible driver of demand for construction labour in 2026, even as homebuilding continues to be restrained by high interest rates.