Massive labor market miss Massive labor market miss http://www.federatedinvestors.com/mmdt/static/images/mmdt/mmdt-logo-amp.png http://www.federatedinvestors.com/mmdt/daf\images\insights\article\job-losses-small.jpg August 7 2026 August 7 2026

Massive labor market miss

The poor combined results of May, June and July probably keep the Fed on the sidelines.
Published August 7 2026

Bottom line

US nonfarm payrolls posted a significant downside surprise in July, with a much weaker-than-expected loss of 23,000 jobs. Consensus expectations were for a gain of 80,000 jobs in July and our estimate here at Federated Hermes for a gain of 99,000. Moreover, the Bureau of Labor Statistics (BLS) revised the last two months down by a combined 103,000 jobs. June’s results fell from a gain of 57,000 to 20,000; May saw job growth drop from 129,000 to a final gain of 63,000. For comparison, April saw payrolls rise by a robust 148,000 jobs.

Private payrolls also came in soft. The country added only 30,000 jobs in July (consensus was for a gain of 82,000 jobs), with a combined downward revision of 55,000 jobs in May and June. The BLS lowered its initial estimate to a gain of 61,000 jobs in May (down from 97,000) and 30,000 jobs in June (preliminary gain of 49,000). In sharp contrast, April had posted an increase of 150,000 jobs.

What happened? Weakness in the local government sector played a big role. The US lost 57,000 there in July, mostly in education. This might be attributable to a quirk in reporting, as a drop in teacher employment usually happens in May or June ahead of summer break. The BLS counts teachers whose jobs are paused as lost. This may be a timing issue that should reverse itself in coming months.

But the country also lost 40,000 leisure & hospitality and 19,000 retail jobs in July — the second month in a row of losses. This is surely attributable to the unwind of the temporary hiring spike we saw in April and May related to the international soccer tournament and our America250 celebrations. The soccer matches ran from June 11 to July 19, with 11 US host cities. Tourism and fan enthusiasm were strong. As a result, retail sales, a category that includes restaurants and bars, increased 7% year-over-year (y/y) in May and June.

We need more immigrant labor The foreign-born civilian labor force declined by 550,000 people (a 1.7% drop) this July from a year ago, while the number of foreign-born employed people fell by 278,000 workers (0.9% decline). Their unemployment rate declined to 3.3% in July from 4.1% a year ago, which suggests that immigrants are eager to work. But our deportation policies over the past year have had a deleterious impact on the foreign-born contribution to the labor market, particularly in important industries such as agriculture, hospitality and construction.

Unemployment rate slips for the wrong reasons The official unemployment rate (U-3) slipped to a one-year low in July of 4.1%, while the broader labor impairment rate (U-6) held steady at a one-year low of 7.9%. But the labor force participation rate (the share of the population either working or actively looking for work) declined to a five-year low of 61.4%. While the number of unemployed people declined by 178,000 in July, the civilian labor force fell by 264,000 last month and household employment dropped by 87,000.  

Inflation continues to moderate Average hourly earnings in July increased by a seven-month low of 0.1% m/m and by a five-year low of 3.2% y/y. Next week’s retail and wholesale inflation readings for July will be important. The consensus expects that core CPI retail inflation will decline again from a seven-month high rate of 2.9% y/y in May 2026 to 2.6% in June to an estimated five-year low of 2.5% in July. Core PPI wholesale inflation is projected to decrease from a three-year high rate of 4.9% y/y in April 2026 to 4.7% in June to an estimated four-month low of 4.1% in July. 

What will the Fed do on September 16? We believe the combination of today’s weaker-than-expected labor-market report and moderating inflation will keep the Federal Reserve on the sidelines at its next policy-setting meeting. Built into this opinion is our feeling that the Fed will look through the temporary energy supply shock from the Iran conflict and keep rates unchanged for the rest of 2026. Chair Kevin Warsh’s first keynote address at the Fed’s upcoming monetary policy symposium in Jackson Hole, Wyo., on August 28 may provide some important clues to his thought process on inflation and interest rates. He also might give an update on the status of his five new task forces he commissioned to orchestrate regime change at the Fed. Even if the financial markets do not like what they hear, we think any resulting pullback to be temporary, and also attributable to the current elevated levels.

Other key labor-market indicators are mixed: 

  • ADP private payrolls disappoint July rose by a weaker-than-expected gain of 44,000 jobs (consensus gain of 65,000 expected) versus 95,000 jobs in June and a 16-month high of 122,000 jobs in May. Workers who changed jobs last month saw their wages rise by 7.0% y/y, less than half the cycle peak of 16.1% in April 2022, but up from gains of 6.8% in June and 6.3% in May. Job stayers earned a more modest boost of 4.4% y/y for the second consecutive month, well below the peak of 7.8% in September 2022.
  • Challenger, Gray & Christmas layoffs decline Companies announced job cuts of 33,429 in July, 27% less than June and 46% lower than year-ago levels. The technology industry accounted for 30% of the layoffs last month, likely due to the growing adoption of Artificial Intelligence. 
  • Initial weekly jobless claims This high-frequency leading employment indicator declined to a 57-year low of 189,000 claims for the July survey week that ended July 17. 
  • Job Openings & Labor Turnover Survey (JOLTS) The lagging JOLTS report was slightly softer than expected in June, as job openings of nearly 7.36 million were down 2% from May levels, but still 12% higher than December 2025’s five-year low of 6.55 million. However, that’s 40% below a record 12.182 million job openings in March 2022. New hires at 5.35 million in June rose by 2% from May and by 9% from February’s six-year low of 4.9 million. The rate of job openings at 4.4% in June slipped from 4.6% in April but is still above December 2025’s five-year low of 4.0%. The record was 7.4% in March 2022. The ratio of available job openings for every unemployed worker was unchanged for the fourth consecutive month at 1.0 in June, up from a five-year low of 0.9 in February, but still well below a peak of 2.0 in March 2022. The quits rate held steady in June at 2.0%, up from a six-year low of 1.9% in April. 

Sector details mixed:

  • Temporary help (an important leading employment indicator) added 3,000 jobs in July, marking its sixth gain over the past seven months. 
  • Manufacturing added 5,000 jobs in July, and June was revised sharply higher to a gain of 11,000 jobs (preliminary increase of 3,000). That’s consistent with the July ISM manufacturing index, which hit a four-year high of 55.6 in July. 
  • Construction surged to a six-month high of adding 22,000 jobs in July for the fifth consecutive month, likely due to capital expenditures and data center construction. 
  • Retail lost 19,000 jobs in July after shedding 4,000 jobs in June, in the wake of gains in four of the previous five months. Retail sales were solid during “Marpril” and were very strong in May and June, so the recent declines are probably related to reversing the hiring in bars and restaurants.
  • Leisure & hospitality hiring declined by 40,000 jobs in July and by 43,000 in June (preliminary loss of 61,000 jobs), after adding 42,000 workers in May. This is likely relating to unwinding national hiring for the soccer tournament and America250.

Read more about our views and positioning at Capital Markets.

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