The labor market lowdown

The US economy has weathered everything from tariffs to an oil shock this year. Today, we got a jobs report that economists would call a “big kick in the gut.”

• Nonfarm payrolls fell by a seasonally adjusted 23,000 in July, missing expectations for gains of 83,000.
• The decline was driven by a loss of 50,000 local government education jobs and 19,000 fewer retail positions, though healthcare and construction continued to add jobs.
• The unemployment rate, meanwhile, fell to 4.1% from 4.2%, but only because fewer Americans are looking for work. The labor force participation rate dropped to 61.4%, a five-year low—and its lowest rate in 50 years if you exclude the Covid-era decline.

That’s bad enough on its own, but then came the revisions: The government slashed its May and June payroll estimates by a combined 103,000 jobs, suggesting the labor market is much weaker than previously thought.

One bright spot: Layoffs remain low. Initial jobless claims came in at just 199,000 on Thursday, marking a third straight week below 200,000—the first such streak since 1969. Layoffs so far this year are also 41% below the same period in 2025. That’s not necessarily a sign of a healthy labor market—it’s simply another indicator of a “low-hire, low-fire” environment.

The Fed’s next move

While the economy suffers, Wall Street is cheering after today’s weak jobs report makes another Fed rate hike look increasingly unlikely.

The Fed has been weighing two competing risks. On one hand, raising interest rates would help keep inflation in check: In June, consumer prices posted their biggest month over month decline in six years as energy prices fell, but renewed geopolitical tensions have since raised concerns that inflation could accelerate again. On the other hand, raising rates could further weaken an already softening labor market.

Today’s disappointing jobs report may have made that decision a little easier. Kalshi now puts the odds of the Fed holding rates steady in September at 65%, up from roughly 50% before the report. Meanwhile, CME’s FedWatch tool now shows 58.1% odds of a pause, versus 45% yesterday.

The next major test comes on August 12, when fresh CPI data will be released. That report should offer a clearer picture of whether inflation is cooling enough for the Fed to keep rates on hold after its next FOMC meeting in September.—SY