The labor market’s new math

Article originally posted on CoStar on August 12, 2026

The July employment report was weaker than expected, with nonfarm payrolls declining by 23,000, according to the U.S. Bureau of Labor Statistics, breaking a four-month streak of jobs gains.

The number was far below consensus estimates of roughly 80,000 to 85,000 job gains. Moreover, downward revisions for both May and June left employment gains over the prior two months 103,000 lower than previously reported, suggesting that the labor market may not be quite as resilient as it has recently appeared.

The slackening in July was broad-based, led by governments, especially local education systems, which shed 53,000 positions as the school year ended and teachers were let go for the summer.

Accommodation and food services lost 24,000 positions, likely due to the end of the World Cup competition, which drew tourists from around the globe to host cities, boosting hotel stays and restaurant meals. Other sectors seeing job losses included retailers, the arts and entertainment industry, financial services and transportation and warehousing.

Still, job gains were seen in many industries, including the education and healthcare sector, which has been the driving force behind job growth since the pandemic. This sector added 25,000 jobs in July and has been the largest contributor to job growth over the year, now employing more than 15% of all nonfarm workers.

Indeed, in the past 12 months, the sector added more than a half-million jobs, offsetting almost all jobs lost in other parts of the economy — including governments, which lost 315,000 jobs to Department of Government Efficiency-related cuts.

The Bureau of Labor Statistics’ household survey amplified the signs of labor market softness and was only somewhat masked by a dip in the unemployment rate. At 4.1%, the unemployment rate now matches its level in June 2025, having fallen substantially from its recent peak of 4.5% in November.

The reason for the decrease, though, does not reflect stronger hiring, as the number of employed people declined in July, according to that survey. However, an even larger number of people have left the labor force, as the labor participation rate fell to 61.4%, its lowest level since September 2020, when the nation was in the throes of the pandemic.

Declining labor force participation has been a trend throughout 2026, with roughly 1.4 million fewer people now working or looking for work compared to January, largely driven by restrictive immigration policies and accelerating baby boomer retirements, a trend expected to peak this year.

Slower labor supply growth has reduced the number of job gains needed to keep the unemployment rate stable, which is now estimated at around 20,000 per month. Given the wide error bands around this estimate, occasional months of job losses are to be expected.

Taken together, the data suggests that the labor market is slowing amid historically low hiring, but that is to be expected as fewer people look for work.

According to the Bureau of Labor Statistics’ latest Job Openings and Labor Turnover Survey, the hiring rate has been below 3.5% for about two years. This coincides with decade-low levels of voluntary job quitting and an involuntary layoff and discharge rate of 1.1%, below its long-run average.

While some sectors — most notably the information field — have seen an increase in layoffs, most employers appear to be retaining their employees. Recent data on unemployment claims continue to show fewer than 200,000 claims filed, a number consistent with a low-hire, low-fire environment.

This slower labor market churn is, in turn, reducing competition for jobs and workers and weighing on wage growth. Average hourly earnings slowed markedly in July, rising by a mere 0.1% in the month, bringing the year-over-year gain down to 3.2%, its slowest pace since May 2021.

Growth in average hourly earnings has consistently outpaced inflation, as measured by the consumer price index, over the past three years through April, supporting the purchasing power of households dependent on wage income. As inflation surged due to the conflict in the Middle East, that relationship reversed, diminishing real incomes and potentially impacting consumer spending.

This poses a potential quandary for the Federal Reserve as it weighs the balance of risks to its forecasts. Policy options to address the risks of persistent supply-side inflation largely conflict with options to support a potentially weakening consumer economy.