Washington: US employers unexpectedly cut 23,000 jobs last month, while Labour Department revisions shaved 103,000 jobs off payrolls in May and June. The unemployment rate dipped to 4.1 per cent only because fewer Americans remained in the labour market.
The July jobs report from the Labour Department, released on Friday, marked a sharp reversal for the American labour market and a political setback for President Donald Trump less than three months before his Republican Party seeks to retain full control of Congress in the midterm elections.
Forecasters had expected job creation to approach 100,000 last month.
Local public schools cut 50,000 jobs in July, while restaurants and bars shed 26,000 jobs and retailers cut 19,000.
The 4.1 per cent unemployment rate was the lowest since June 2025, but it fell for the wrong reasons. Around 264,000 people left the labour market, reducing competition for jobs. The share of people either working or looking for work fell to 61.4 per cent, the lowest level since February 2021.
The Trump administration, which has imposed sweeping tariffs in an effort to boost manufacturing jobs, noted that employment rose by 22,000 in construction and by 5,000 in manufacturing.
“The Trump industrial resurgence is on schedule. Manufacturing and factory construction jobs grew again in July even as government payrolls continued to significantly shrink," White House spokesman Kush Desai said.
Hiring had rebounded this year from a lacklustre 2025 despite the conflict in the Persian Gulf, which has driven up energy prices and put pressure on household budgets. Job growth had been steady, though unspectacular. Some businesses continue to struggle to fill vacancies, while others are increasingly relying on technology to perform work previously done by people.
Americans who are employed continue to enjoy unusual job security. Lay-offs remain low by historical standards, with companies reluctant to reduce staff after experiencing severe labour shortages following the COVID-19 lockdowns.
During one week in July, the number of Americans filing for unemployment benefits fell to its lowest level in more than 50 years. The jobless rate had dropped to 4.2 per cent in June, the lowest in a year, and economists had expected it to remain unchanged last month, according to a FactSet survey.
However, Americans who have lost their jobs, or those entering the labour market for the first time, continue to face difficulty finding work.
Economists have described the current conditions as a "no hire, no fire" labour market.
So far this year, employers have added an average of 61,000 jobs a month, up from 9,700 in 2025, the weakest pace outside a recession since 2002.
The United States no longer needs to create as many jobs as before to keep unemployment from rising. Trump's immigration crackdown and the continued retirement of baby boomers have reduced the number of people competing for work. As a result, the monthly "break-even" hiring rate, estimated at 155,000 during 2023-24, may now be close to zero, according to a Federal Reserve study.
"There are just fewer people available to hire," said Sal Guatieri, Senior Economist at BMO Capital Markets.
For some workers, labour shortages have translated into higher wages. Payroll processor ADP reported on Wednesday that people who changed jobs last month received an average 7 per cent pay rise, the largest year-on-year increase in nearly a year, compared with a 4.4 per cent increase for those who stayed with their existing employers.
At the same time, companies have become more productive by using technology to perform tasks previously carried out by employees.
"We are seeing companies produce more with their current staff," Guatieri said. "So there's less need to take on new workers."
Shortages of available workers and rising productivity, he added, "will keep the lid on the rate of hiring and monthly job growth."
The outlook for hiring also remains clouded by continued fighting in the Persian Gulf, which has increased energy prices and squeezed household budgets, as well as the rapid rise of artificial intelligence, which could either improve worker productivity and wages or replace jobs altogether.
In a report published this week, researchers Ingrid Chen, Marianna Kudlyak and Riva Mikhlin of the Federal Reserve Bank of San Francisco found that finding a job has become unexpectedly difficult over the past two years.
Normally, at this stage of an economic expansion—more than six years after the last recession—employers would be more willing to hire younger workers and people with lower levels of education due to labour shortages. Instead, the researchers found that "the pipeline into employment is shrinking such that the recovery is no longer reaching workers at the margins."
They also found that unemployed people who usually return to work most quickly, including those aged 25 to 54 and college graduates, are now struggling to secure new jobs.
The researchers said the reasons remain unclear but suggested the slowdown could be linked to the immigration crackdown, weaker hiring by technology companies and government contractors, uncertainty over government policy, or "early signals of broader labour market deterioration."