U.S. employers unexpectedly cut 23,000 jobs in July, marking a sharp reversal for the American labor market and a political setback for the Trump administration less than three months before midterm elections.

The Labor Department's jobs report on Friday also revealed that payrolls in May and June were revised downward, shedding a combined 103,000 jobs. Forecasters had anticipated job creation to approach 100,000 for July.

Significant job losses occurred in public schools, which cut 50,000 positions, followed by restaurants and bars, which reduced payrolls by 26,000, and retailers, which lost 19,000 jobs. Construction companies added 22,000 jobs, and factories saw an increase of 5,000 positions.

The unemployment rate dipped to 4.1% in July, reaching its lowest point since June 2025. However, this decrease was due to a significant number of Americans leaving the labor market, with 264,000 individuals dropping out. The labor force participation rate fell to 61.4%, the lowest since February 2021.

White House spokesman Kush Desai noted that manufacturing and factory construction jobs grew in July, stating, “The Trump industrial resurgence is on schedule. Manufacturing and factory construction jobs grew again in July even as government payrolls continued to significantly shrink.’’

Prior to this report, hiring had shown resilience throughout the year, rebounding from a lackluster 2025. This was despite strains from the conflict in the Persian Gulf, which had sent energy prices surging and impacted household budgets. Some businesses have reported difficulties filling vacancies, while others have increased productivity through technology.

Americans who retained employment have experienced unusual job security, with layoffs historically low. Companies, still mindful of labor shortages experienced after COVID-19 lockdowns, have been hesitant to reduce staff.

Economists have described the current labor market conditions using the term “no hire, no fire,” reflecting the unusual stability. So far in 2026, employers have added an average of 61,000 jobs per month, a notable increase from the 9,700 jobs per month average in 2025, which was the weakest outside of a recession since 2002.

Factors contributing to the shrinking labor pool include the Trump administration's immigration policies and the ongoing retirement of baby boomers. A Federal Reserve study suggests the “break-even” rate of monthly hiring needed to maintain a stable unemployment rate has dropped significantly, potentially approaching zero.

“There are just fewer people available to hire,” said Sal Guatieri, senior economist at BMO Capital Markets. He also noted that companies have become more productive, using technology to enhance output with their existing staff, reducing the need for new hires. "We are seeing companies produce more with their current staff," Guatieri said. "So there’s less need to take on new workers.”

Rising productivity and labor shortages are expected to limit future hiring growth. The outlook for the labor market is further complicated by fluctuating energy prices due to global conflicts and the increasing influence of artificial intelligence.

A report from the Federal Reserve Bank of San Francisco indicated that finding employment has become more challenging in recent years. Researchers found that workers at the margins of the labor force, typically those with less education or younger individuals, are not being absorbed as readily as in past economic expansions.

Even prime-working-age individuals with college educations, who typically find new jobs quickly, are facing difficulties. The San Francisco Fed researchers cited potential contributing factors such as immigration policies, hiring slowdowns in specific sectors like tech and government contracting, uncertainty surrounding government policies, and early signs of broader labor market deterioration.