The U.S. labor market stalled sharply in July, cutting 23,000 jobs and missing expectations of 100,000 additions. Downward revisions also stripped 103,000 jobs from May and June, presenting a major economic hurdle ahead of the midterm elections.
Key Labor Market Metrics
- Job Losses: Net decline of 23,000 jobs in July, driven by cuts in local public schools (-50,000), restaurants and bars (-26,000), and retail (-19,000).
- Unemployment Rate: Dropped to 4.1%, but primarily because 264,000 workers exited the workforce. Labor force participation fell to 61.4%.
- Bright Spots: Construction added 22,000 jobs, while manufacturing rose by 5,000.
- Wage Growth: Average hourly pay grew 3.2% year-over-year, marking the lowest annual increase since May 2021.
Economic & Federal Reserve Implications
- Federal Reserve Dilemma: Weak job growth and cooling wage gains give Fed officials pause as they weigh interest rate hikes to fight persistent inflation above their 2% target.
- "No Hire, No Fire" Dynamic: Layoffs remain historically low as employers hold onto existing staff. However, new entrants, young workers, and job seekers face significant difficulty landing roles.
- Political Fallout: The downturn complicates White House claims of an economic boom, while a reported 720,000 12-month drop in native-born employment undermines key policy narratives.
- Structural Drag: Ongoing Middle East conflict, rising energy costs, and shifting adoption of artificial intelligence continue to weigh on long-term hiring confidence.
Once again, it's all about labor supply. This morning's jobs report showed a 23k drop in payrolls for July, along with downward revisions of 103k for the previous two months. Yet the unemployment rate dropped to 4.1%... because of labor supply.
How does it work? Well, the number of employed people dropped by 87k after seasonal adjustments, but the overall labor force shrank by 264k. In other words, many people who were looking for jobs stopped looking. They no longer contribute to the unemployment rate.
It's not as though these people don't want to work. Many of them would like to have jobs, but they've essentially given up or taken a break from searching. In our low-hire, low-fire labor market, that's not a surprise.
This is a pattern. Since July 2025, the unemployment rate has fallen by 0.2% while the labor force has lost 1.3 million workers. This is bad for matching in the labor market, since companies have fewer workers to choose from.
It's also bad for the economy overall. A smaller labor force means less economic output and less income – especially income to pay for the retirements of the enormous Baby Boom generation. We need more workers right now, not fewer.
The news isn't bad for everyone, though. The unemployment rates for Hispanic/Latino and especially Black Americans have come down sharply in the past year. A key question will be whether we can lock in these gains while allowing the labor supply to resume its growth.
How Much of the 10-Year Is the War?
This morning's employment report may have given us the first real test of one of the biggest debates in fixed income. July payrolls declined outright against expectations for a solid gain, and the prior two months were revised down by a combined 103,000 jobs. Those revisions point to a labor market that looks much closer to the one we had before the Middle East conflict sent oil prices higher and Treasury yields sharply upward.
Most people I talk to attribute the recent spike in the 10-year Treasury to the war, and for the move itself they're right. Oil pushed through $100, second-quarter inflation picked up on energy costs, and the market briefly priced two additional Fed hikes by year-end. By late July, the 10-year had touched 4.75%.
This morning's employment report may have given us the first real test of one of the biggest debates in fixed income. July payrolls declined outright against expectations for a solid gain, and the prior two months were revised down by a combined 103,000 jobs. Those revisions point to a labor market that looks much closer to the one we had before the Middle East conflict sent oil prices higher and Treasury yields sharply upward.
Most people I talk to attribute the recent spike in the 10-year Treasury to the war, and for the move itself they're right. Oil pushed through $100, second-quarter inflation picked up on energy costs, and the market briefly priced two additional Fed hikes by year-end. By late July, the 10-year had touched 4.75%.
What that explanation misses is the starting point. Before the strikes, the 10-year had spent the better part of five months oscillating around 4 percent, trading into the 3.9s as recently as February as slowing growth and expectations for three Fed cuts supported lower rates. Most of the move from that regime to today reflects the conflict, with some help from employment data that initially appeared much stronger than today's revisions suggest.
This is where I part ways with the debasement framing making the rounds. The fiscal math is real. Deficits running above 6 percent of GDP and annual interest costs exceeding $1 trillion help explain why the 10-year no longer belongs near the 2 percent average of the 2010s. That era reflected conditions that no longer exist: a Federal Reserve buying trillions of dollars of Treasuries, inflation persistently below target, and deficits roughly half their current size.
Those structural changes explain why today's floor is closer to 4 percent than 2 percent. They don't explain why the 10-year jumped from roughly 4 percent to nearly 4.75 percent over the course of four months. The deficit didn't change meaningfully in March. Oil did. Attributing this spring's spike to fiscal decay confuses the floor with the move.
If that framework is right, today's employment report becomes an important test. Like many, I initially viewed the spring payroll reports as evidence of a surprisingly resilient labor market. The revisions suggest a different story, one that is much more consistent with the economy that had the 10-year trading below 4 percent in February. From here, I'm watching crude oil and 10-year breakeven inflation rates. If those retrace, the market is likely unwinding an energy-driven inflation scare. If they don't, investors may be repricing something more durable.
My takeaway is straightforward: the war explains most of the recent move, the deficit explains why the round trip is unlikely to go all the way back to the 2% world of the 2010s, and today's labor data reminded investors what the economy looked like before the strikes.
Where the 10-year ultimately settles is the single most important question in real estate capital markets.
Canada's economy added 75,100 jobs in July—quadrupling forecasts—dropping the unemployment rate to a two-year low of 6.4%.
July Jobs Data
- Job Creation: +75,100 (vs. 16,500 expected), split between full-time (+38,600) and part-time (+36,600).
- Unemployment: Fell to 6.4% from 6.5%, the lowest since July 2024.
- Sector Growth: Driven by private-sector hiring in retail, wholesale, finance, and professional services.
- Wage Growth: Hourly wages for permanent workers slowed to 3.0% (down from 3.7% in June), the lowest pace since February 2022.
Economic Impact
- Bank of Canada: Rates remain unchanged at 2.25%. Slowing wage inflation gives the central bank breathing room despite strong growth.
- Economic Resilience: Rebounds sharply after a weak Q1, navigating U.S. tariffs and geopolitical tension with expected Q2 growth near 3.4%.
- Market Reaction: The Canadian dollar rallied 0.4% to an eight-week high of C$1.3959.
Friday's jobs report tells a sobering story about the U.S. economy:
📉 July: -23,000 jobs, plus a brutal 103,000 downward revision to the prior two months
📊 Job growth has averaged just 34,000/month over the past year — and only 20,000/month over the last quarter
📉 Compare that to 178,000/month in the pre-pandemic years of Trump's first term, or 103,000/month in Biden's final year
**Where the jobs are (and aren't):**
✅ Construction (+22K), healthcare (+22K), professional/business services (+18K), even manufacturing (+5K)
❌ Retail (-19.4K), leisure & hospitality (-40K), local government education (-49.6K)
**The bigger signal:** wages were flat last month — meaning real (inflation-adjusted) income likely fell. And the labor force participation rate has dropped to 61.4% from 62.2% in a year, as 2.8 million people exited the workforce entirely (retiring boomers + possibly immigration policy effects). That's also why unemployment ticked down to 4.1% — fewer people are even counted as looking for work.
Full-time jobs are down 1.3 million year-over-year; part-time jobs are up 311,000.
Employers aren't firing en masse, but they're not hiring either — likely a mix of tariff uncertainty and AI-driven caution. It's showing up in the polls too: only 30% of Americans approve of the administration's economic handling, down from 43% a year ago.
The miss and the revisions. Frame it as: the last three months of “strength” were a mirage, revisions erased 103K jobs we thought existed.
The unemployment rate trap. Rate fell to 4.1%, sounds good, right? Wrong. It fell because a quarter-million people stopped looking. That’s not a healthy labor market, that’s people leaving the game.
The unemployment rate trap. Rate fell to 4.1%, sounds good, right? Wrong. It fell because a quarter-million people stopped looking. That’s not a healthy labor market, that’s people leaving the game.