The U.S. Bureau of Labor Statistics released data on Friday showing that the seasonally adjusted non-farm payroll figure for July came in at -23,000, far below the previous month's revised figure of 20,000 and well short of the 80,000 expected by economists. This represents a significant miss. However, the U.S. unemployment rate for July fell from 4.2% to 4.1%, marking its lowest level since July 2024, suggesting that the weakness in the labor market is primarily concentrated in a decline in short-term employment numbers.

The combined downward revision for May and June non-farm payrolls totaled 103,000, with June's figure revised from 57,000 down to 20,000. This adjustment was far more aggressive than markets had anticipated, meaning that the cumulative non-farm payroll additions over the past three months stand at just 20,000. This is significantly below the cumulative market expectations and indicates that the U.S. labor market's capacity to absorb workers is severely lacking, particularly in recent months. It is important to note that the drop in the unemployment rate from 4.2% to 4.1% was not driven by an expansion of the workforce (the numerator), but by a decline in the working-age population (the denominator). The actual number of employed people fell by 87,000 in July, while the working-age population dropped by a much larger 264,000. The denominator's decrease outpaced the numerator's decrease, leading to the lower unemployment rate.

What to focus on

Following the release of the July non-farm payrolls report, the CME FedWatch Tool's probability for a September Federal Reserve rate hike plummeted from 55% to 42.1%. This sharp decline shows that the weak employment data has severely shaken institutional confidence in the health of the U.S. labor market. For the Federal Reserve's policy meetings in October, December, and January of next year, the probability of a 25-basis-point rate hike is now below the neutral 50% threshold. As expectations for rate hikes cooled, the U.S. Dollar Index fell sharply, while gold, silver, non-USD currencies, and the U.S. stock market all rebounded or rose.

Looking at recent macroeconomic performance, two core factors are driving the weakness in the U.S. labor market. The first is the uncertain outlook for the conflict between the U.S. and Iran, which is hitting corporate expansion confidence. Particularly after the signing of a memorandum of understanding between the U.S. and Iran, a new round of mutual attacks has begun. This volatile international situation is severely impacting business confidence in the economic outlook, leading to reduced hiring. The second factor is the continued financing and investment by major AI companies in infrastructure construction. From a supply perspective, AI infrastructure investment is beneficial for U.S. macroeconomic growth. However, because artificial intelligence has a clear substitution effect on basic jobs, this expansion could significantly damage monthly new job creation data.

The number of employed people in the U.S. fell from 162.264 million in June 2026 to 162.177 million in July 2026 (a decrease of 87,000). This is a significant decline from the peak of 164 million seen in December 2025. Although the decline in the employed population might appear to be driven by an increase in retirements and a decrease in immigration, the labor force participation rate for prime-age workers (ages 25 to 54) has hit new lows. This indicates that a declining willingness to work is also having a notable impact on the employed population data. The reasons behind the declining willingness to work among prime-age workers are complex, including insufficient wages, job mismatches, as well as issues of burnout and mental health. Regardless of the cause, this decline in labor force participation is a very concerning signal for the future development of the U.S. labor market.