The job market was the part of the economy that kept its balance. It was supposed to be recovering from a weak 2025, not sliding again.
Revisions make the recent stretch look even softer. The Labor Department revised June's payroll count down to 20,000 and cut May to 63,000, which is 66,000 below the earlier reading.
The average monthly gain over the past year now sits at just 34,000 jobs.
The unemployment rate fell to 4.1%. But that drop is not the good news it looks like.
A separate survey of households found 87,000 fewer people working. The decline in the jobless rate was tied to a drop in labor force participation, not to more employment.
The portion of adults who are employed or actively seeking work - the labor force participation rate - dropped to 61.4%. That is the lowest in more than five years, and excluding the Covid period, the lowest since mid-1976.
Bill Adams, chief U.S. economist at Fifth Third Commercial Bank, pointed to demographics: "Immigration compensated for the aging of the workforce in the first few years of the post-pandemic expansion, but that's not happening anymore."
The share of working-age adults who actually have a job, known as the employment-to-population ratio, slipped to 58.9%. That is the weakest since May 2014.
A broader jobless measure, which includes discouraged workers and people working part time for economic reasons, stayed at 7.9%.
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Where did the losses hit? Government employment dropped by 53,000, and local government education lost 50,000 jobs.
Leisure and hospitality shed 40,000 jobs, possibly because the World Cup had just ended. Retail gave back 19,000, while financial activities lost 14,000.
The private sector still added 30,000 jobs. Healthcare, the usual engine of growth, added 22,000, below its 36,000 monthly average over the past year.
Inflation is still well above the Fed's 2% target. That has some officials leaning toward another hike.
This report gives them a reason to pause. "Before today, many were expecting that the Fed had no choice but to raise rates in order to fight stubbornly high inflation, because the job market was so strong, but this report shows that isn't the case," according to Chris Zaccarelli, chief investment officer at Northlight Asset Management.
The Fed's rate-setting committee, the FOMC, voted 9-3 last week to keep its benchmark rate unchanged.
Wages tell a similar story. Average hourly pay rose 2 cents, and yearly wage growth slowed to 3.2%.
That is below the 3.5% forecast and the weakest since May 2021. Cooler pay growth helps inflation, but it also leaves workers with less spending cash.
"The July employment report solidified that the labor market is not out of the woods quite yet," Nicole Bachaud, labor economist for ZipRecruiter, said.
Markets read the report as a sign that the Fed might hold off. Stocks gained ground, with Dow Jones Industrial Average futures close to 200 points higher, while Treasury yields fell sharply after starting the session near flat.
If hiring is cooling, the Fed has less reason to raise rates, and that tends to lift stock and bond prices.
A weak jobs report can be good news one month and bad news the next. If wages keep slowing, consumers will feel it, and consumer spending carries a huge share of the economy.
The labor market no longer looks like the safe bet it did a few months ago. The Fed has to balance inflation against a cooling job market, and every new report on wages and hiring will tip that balance.
For investors, the next few reports on wages and hiring will carry the most weight.
The report is the latest sign that the post-pandemic expansion has lost momentum. Hiring has averaged only 34,000 per month over the past year, and the participation rate has fallen to levels not seen since the 1970s outside the pandemic. That combination leaves households and policymakers facing an unusual mix: weak job creation, slowing wage growth, and inflation still above target.
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