Nonfarm payrolls fell by 23,000 in July, missing estimates for an 83,000 gain.
Unemployment rate declined to 4.1%; so did labor force participation.
Markets scaled back expectations of a September Fed rate hike, boosting stocks.
The US labor market unexpectedly contracted in July, with nonfarm payrolls posting their first monthly decline in years as hiring weakened across several sectors, reinforcing concerns that employment momentum is slowing even as inflation remains above the Federal Reserve's target.
According to the Bureau of Labor Statistics, nonfarm payrolls fell by a seasonally adjusted 23,000 in July, following a downwardly revised decline of 20,000 jobs in June.
Economists surveyed by Dow Jones had expected employers to add 83,000 jobs during the month.
The report also included sharp downward revisions to previous data, with payroll gains for May and June revised lower by a combined 103,000 jobs.
Despite the decline in payrolls, the unemployment rate edged down to 4.1% from 4.2%, helped largely by another drop in labor force participation, which slipped to 61.4%, the lowest level in more than five years.
The report came on the heels of another report by ADP, which said private nonfarm employment rose by a seasonally adjusted 44,000 jobs during the month, falling well short of economists' expectations for a gain of 75,000.
Hiring weakness spreads across multiple sectors
Job losses were broad-based across several industries.
Employment in local government education declined by 50,000 positions during July after remaining largely unchanged over the past year.
Retail trade shed 19,000 jobs as warehouse clubs, supercenters and general merchandise retailers eliminated 21,000 positions, while gasoline stations cut another 5,000 jobs.
Those declines were partly offset by a gain of 10,000 jobs among sporting goods, hobby, musical instrument, book and miscellaneous retailers.
Financial activities also remained under pressure, losing 14,000 jobs during the month.
Credit intermediation and related activities accounted for 9,000 of those losses, while insurance carriers and related businesses cut another 7,000 positions.
Employment in financial services has now fallen by 121,000 jobs since peaking in May 2025.
Health care remained one of the few bright spots in the labor market, adding 22,000 jobs during July.
However, that represented a slower pace than the average monthly increase of 36,000 recorded over the previous year.
Ambulatory health care services accounted for 18,000 of the new positions.
Wage growth also remained subdued.
Average hourly earnings for all private-sector employees were little changed at $37.62, increasing by just 2 cents during the month and rising 3.2% from a year earlier.
Production and nonsupervisory workers saw their hourly earnings rise by 4 cents to $32.40.
Conflicting signals emerge on labor market
The weak payroll report contrasted with a recent analysis from the Bank of America Institute, which suggested hiring activity may have strengthened in July based on deposit account data.
The report indicated that employment growth was led by lower-income households, whose after-tax wage growth surpassed that of higher-income workers for the first time since December 2024.
"What's driving the pick-up in after-tax wage growth among lower-income households? Alongside strong job growth, we have also observed a rise in job-to-job movements disproportionately boosting lower-income pay growth," the analysis said.
Markets reduce expectations for September rate hike
The employment report comes at a sensitive time for the Federal Reserve, whose policymakers remain divided over the path of interest rates.
Several Fed officials have recently argued that rates may need to rise as soon as September if inflation fails to slow further.
Last week, the Federal Open Market Committee voted 9-3 to keep its benchmark interest rate unchanged.
Following Friday's jobs report, traders reduced expectations for another near-term rate increase.
According to CME Group's FedWatch tool, the probability of a September rate hike fell to 44%, while expectations for an October increase eased to 58.3%.
Financial markets welcomed the softer employment data as a proxy that the Fed won't need to raise interest rates soon.
US stock futures advanced after the release, with Dow Jones Industrial Average futures rising by nearly 200 points, while Treasury yields dropped sharply as investors increased bets that the Federal Reserve may have less urgency to tighten monetary policy further.
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