US labor market shows signs of weakness! July nonfarm payrolls unexpectedly decrease by 23,000; May and June data revised down sharply. Fed rate hike expectations cool down.

According to Zhihui Finance APP, the United States unexpectedly saw a negative change in non-farm payrolls in July, and the previous two months' non-farm payroll growth figures were sharply revised downward, indicating that the US labor market, which demonstrated unexpected resilience earlier this year, is now facing new challenges. This weak employment data, while raising investors' concerns about the US labor market, could also complicate the Federal Reserve's rate decisions as it seeks to balance employment and inflation.

Data released by the US Department of Labor on Friday showed that non-farm payrolls decreased by 23,000 in July, far below the market expectation of an increase of 80,000. Meanwhile, May's non-farm payroll growth was revised down from 129,000 to 63,000, and June's figure was revised down from 57,000 to 20,000. After these revisions, total job growth for May and June was 103,000 lower than previously reported.

The unemployment rate fell from 4.2% in June to 4.1% in July, marking the lowest level since June 2025 and lower than the market expected 4.2%. The labor force participation rate continued to drop, from 61.5% in June to 61.4% in July. Although the unemployment rate remains low, this is largely because a substantial number of workers have exited the labor force, rather than a solid underlying employment situation.

In terms of wage growth, the month-on-month increase in average hourly earnings in July was 0.1%, lower than the market expected 0.3% and June’s 0.3%. The year-on-year growth was 3.2%, below both the market expectation of 3.5% and June’s 3.5%.

Specifically, the decrease in non-farm employment in July was mainly driven by layoffs in government departments, leisure and hospitality, and the retail industry. Private sector employment increased by 30,000 for the second consecutive month, with the healthcare and social assistance sectors acting as the main drivers.

Local government employers cut nearly 60,000 jobs, almost all from the education sector. Since many teachers temporarily leave employment rolls during the summer break and return at the start of the new school year, employment figures in this area typically show large fluctuations in summer. At the same time, federal government jobs also declined.

Leisure and hospitality employment dropped to its lowest level in nearly a year, with restaurants and bars cutting staff. This suggests that the FIFA World Cup, which concluded on July 19, did not boost job growth as many forecasters had previously expected.

Employment in manufacturing and construction continued to grow. Many economists have pointed out that the data center construction boom may become an important driver for increased construction labor demand into 2026, even though high interest rates are still restricting residential building.

Employment in the financial activities sector fell to its lowest level in four years. This sector is a major source of white-collar jobs, which are considered among the most susceptible to disruptions from artificial intelligence (AI) adoption.

This latest employment report shows that, under the effects of rising prices and uncertainty caused by the Middle East war, the US labor market may be beginning to weaken. Although consumer demand has remained resilient so far, prompting some employers to continue with hiring plans, signs of labor market cooling are becoming apparent.

It is worth mentioning that this weak non-farm payroll data could prompt the Federal Reserve to delay its rate hike plans. After the data release, the US Dollar Index DXY fell nearly 30 points in the short term, to 99.67. The gains in the three major US stock index futures also widened. Spot gold surged about $40 in the short term, trading at $4,351.43 per ounce; spot silver rose more than $1 in the short term, at $64.72 per ounce. The two-year US Treasury yield, which is more sensitive to short-term adjustments in Fed policy, fell 8 basis points on Friday to 4.16%; the 10-year Treasury yield fell 6 basis points to 4.62%.

Pricing in the US interest rate futures market indicates that expected rate hike by December is only 28 basis points, down from 32 basis points before the non-farm payroll data was released. After the July non-farm report, investors are now shifting their focus to the US July Consumer Price Index (CPI) data due next week to assess what actions the Federal Reserve may take in September.