The US economy unexpectedly lost 23,000 jobs last month

(CNN) — A summer hiring slump dogged the US labor market in July as the economy unexpectedly lost 23,000 jobs, according to new data released Friday by the Bureau of Labor Statistics.

The unemployment rate dropped to 4.1% from 4.2% as more people left the labor force.

July’s job gains marked a sharp slowdown from June’s total, which was downwardly revised to 20,000 from 57,000. Following revisions, the jobs created in May were essentially halved, dropping to 66,000 from 129,000. Workers’ pay gains slowed to a five-year low.

The July report fell far short of economists’ expectations for a 95,000-job gain.

It’s always cautioned that one month does not make a trend, and initial economic data snapshots are rarely that clean cut – especially post-pandemic and especially during periods of high uncertainty.

However, when accounting for the nuance in July’s report (more on that below) and putting it in the context of recent months’ data, the labor market remains low-momentum, uneven and one where pay growth can’t keep up with faster-rising prices.

“This was a bleak report, and it signals the labor market is stalling again,” Heather Long, chief economist at Navy Federal Credit Union, told CNN. “You can explain away a few things for July and a few things for June; but if you step back and look at the bigger picture, the past three months have seen 20,000 average job gains – no matter how you look at it, that’s anemic.”

Friday’s report adds to signs that employers are becoming more cautious about hiring as they navigate growing headwinds, which include an aging population, the rapid adoption of AI, higher oil prices, policy uncertainty and the war with Iran.

Which industries added jobs

The job market has been firmly lodged in a “low-hire, low-fire” dynamic that has left few opportunities for job seekers.

“Price volatility may be contributing to increased hesitation from employers,” Nicole Bachaud, labor economist at ZipRecruiter, wrote in a note Friday. “With job opportunities remaining scarce, more workers are exiting the labor market entirely.”

The hiring that is happening also isn’t broad-based, with the bulk coming from just one sector: healthcare and social assistance. That was the case again last month, when that sector added an estimated 22,600 jobs.

“Healthcare has just been a printing press of jobs,” Tom Porcelli, chief economist at Wells Fargo, told CNN in an interview. “But if you strip that out from private (employment, which was up 30,000 jobs in July), the cyclical hiring was only +7,000 jobs. The backdrop is still incredibly uneven.”

Behind healthcare, other sectors that added jobs included construction and areas within manufacturing – industries that have benefited from the AI capital expenditure and data center boom. Sectors such as professional and business services (+18,000) and the tech-dominant information (+11,000) also added jobs.

However, those gains were wiped away by outsized losses in local government (specifically, local schools) and leisure and hospitality.

Seasonality quirks

The World Cup was expected to be a boon for leisure and hospitality as fans filled sports bars across the country and hotels in host cities.

However, in June and July, leisure and hospitality shed 43,000 jobs and 40,000 jobs, respectively, BLS data shows.

“It’s difficult for me to believe that we’ve lost 83,000 jobs over the last two months in leisure and hospitality services, given that the World Cup has been going on,” Gus Faucher, chief economist at The PNC Financial Services Group, said in an interview. “But that’s a very seasonal industry where we tend to see more hiring during the summer, and it could be that seasonal adjustment factors are off for some reason and are not picking up what’s truly reflected in the labor market.”

Faucher is referring to the statistical practice aimed at smoothing out time-of-year patterns to better see underlying trends. However, that methodology comes with some quirks: For example, if hiring activity doesn’t sync with historical norms (such as boosts to summer hiring at restaurants and hotels), that can come across as job losses.

The 57,000-job decline in the local government sector, specifically the 49,600 jobs from local school districts, is best read as “an artifact of seasonal adjustments rather than a genuine loss of jobs,” wrote Jason Pride, chief of investment strategy and research at Glenmede.

“A summer release (of district workers) running about 5% larger than the historical norm produces a 50,000-job adjusted decline out of a million-job gross swing,” he wrote in a note Friday. “Distortions of this kind typically reverse as districts staff up for the new school year.”

In addition to those seasonal adjustment quirks, shifts in hiring patterns are also likely contributing to volatility, ADP’s chief economist Nela Richardson said earlier this week. High levels of macroeconomic uncertainty have resulted in hiring coming in fits and starts.

Also, because of larger structural shifts (notably an aging population and a slowdown in immigration), the economy doesn’t need to add as many jobs as it once did.

However, even accounting for the “funky stuff” possibly going on with the back-end seasonal adjustments, there’s still a clear trend that outside of healthcare, hiring across most industries is stalling, Long said.

‘Americans feel stuck’

It’s a labor market that’s working for some but not for all. Wage growth stalled in July as average hourly earnings rose just 0.1% from June, dropping the annual rate to 3.2%, a five-year low. Workers’ paychecks, on average, are being entirely eaten away by inflation, which measured 3.5% in the latest Consumer Price Index.

“You don’t need a PhD in economics to see that the financial squeeze is real for Americans right now, and I think the second half of this year will be belt-tightening for many families,” Long said.

The weaker wage dynamic picture could work in the favor of the Federal Reserve, which wants to see inflation return to 2%, Wells Fargo’s Porcelli said.

The current job market is not supportive of demand-driven inflation, he said. And given that many issues with inflation are coming from the supply-side right now, the likely course of action means the Fed will stay on hold, he added.

US stocks ticked up Friday after the report and Treasury yields fell as the odds for a Fed rate hike at the September meeting fell to 40%, down from 55% one day ago, according to CME FedWatch.

The latest inflation data will come out next week, starting with the Consumer Price Index on Wednesday morning. Lower gas prices, which were down on average compared to June, likely helped to keep inflation tame at 3.4%, down slightly from 3.5%, EY-Parthenon economists wrote in a note Friday.

But inflation at 3.4%, a recent stretch of tepid job growth and a still incredibly uncertain economic environment likely won’t bring much solace to Americans and their affordability concerns, Navy Federal’s Long said.

“Americans feel stuck right now,” she said. “You’re not going to move with the mortgage rate at almost 7%. You’re not going to get a new job with hiring this anemic. People are holding on to their cars longer; they’re even holding on to their cell phones longer.”

“It’s this stuck feeling, and that’s not the dynamic American economy people want,” she said.