US Employers Cut 23,000 Jobs in July as Iran War Strains Economy

The U.S. job market stalled unexpectedly in July, with employers cutting 23,000 jobs as the economy grapples with the strain of the ongoing Iran war. The unemployment rate dipped to 4.1% — the lowest since June 2025 — but for the wrong reason: 264,000 people dropped out of the labor market, reducing competition for available work, according to AP News.

Forecasters had expected job creation to approach 100,000 last month. Instead, the Labor Department’s monthly employment situation report delivered a sharp miss that NBC News described as a sign the labor market had not stabilized after four months of positive growth.

Revisions Paint a Weaker Picture

The Labor Department also slashed 103,000 jobs from May and June payrolls. May was revised down by 66,000 to 63,000 total jobs added, while June was revised down by 37,000 to just 20,000. The three-month average of job growth now stands at just 20,000, according to InvestingLive.

The labor force participation rate fell to 61.4%, the lowest since February 2021. Local public schools cut 50,000 jobs in July, restaurants and bars cut 26,000, and retailers cut 19,000. The private sector added 30,000 jobs while the public sector lost 53,000, as Breitbart reported.

Construction added 22,000 jobs and manufacturing added 5,000, with durable goods manufacturing up 18,000. Leisure and hospitality fell by 40,000 jobs, potentially reflecting a World Cup hangover as businesses pared back payrolls after the international sports tournament.

Wage Growth Slows

Average hourly earnings rose just 0.1% month-over-month and 3.2% year-over-year — the smallest annual increase since May 2021 and below the 3.5% rate of inflation, according to Yahoo Finance.

“This is a bleak jobs report,” said Heather Long, chief economist at Navy Federal Credit Union. “The U.S. labor market is stalling again and that is going to make the Federal Reserve’s job harder and life for job seekers rough.”

Daniel Zhao, chief economist at Glassdoor, was equally blunt: “We can’t really put lipstick on a pig here. This is not a great report for July.”

A Labor Market Transformed

The weak hiring numbers come against a backdrop of fundamental changes in the U.S. labor market. Trump’s immigration crackdown and baby boomer retirements have reduced the number of people competing for work, meaning the economy needs far fewer new jobs to keep unemployment from rising. The “break-even” rate of monthly hiring has dropped from 155,000 in 2023-2024 to possibly nearly zero, according to a Federal Reserve study.

So far in 2026, employers are adding an average of 61,000 jobs per month — up from 9,700 in 2025, the weakest hiring outside a recession since 2002, but well below the 2023-2024 average of 166,000 jobs per month.

The 2026 Iran war, which began on February 28 after US-Israeli airstrikes killed several Iranian officials including Supreme Leader Ali Khamenei, has sent energy prices surging. Gasoline prices remain elevated at $4.04 per gallon, up 36% since the war began, while inflation remains at 3.5%, well above the Federal Reserve’s 2% target.

Fed Faces a Dilemma

The weak report complicates decision-making at the Federal Reserve, which has kept its benchmark rate at around 3.6% for five consecutive meetings. At the July 29 meeting, three officials dissented in favor of a rate hike to combat persistent inflation, as AP News reported.

“The Fed has to consider the health of the job market as they debate whether a hike is justified,” said Glassdoor’s Zhao. “The softness in today’s report is going to have to give the Fed a little bit of pause.”

Wall Street traders had been expecting rate hikes later this year, with odds of a September hike over 50% before the report. After Friday’s numbers, those odds fell to about 40%. Stocks rose on the news, with the S&P 500 up 0.5% and the Nasdaq up 1%, as investors breathed a sigh of relief that the Fed might not raise rates.

The report also delivers a political setback to President Donald Trump less than three months before the 2026 midterm elections. The White House sought to put a positive spin on the numbers, with spokesman Kush Desai saying, “The Trump industrial resurgence is on schedule. Manufacturing and factory construction jobs grew again in July even as government payrolls continued to significantly shrink.”

What to Watch

Economists will be watching next week’s consumer price index report for July to gauge whether inflationary pressures are building. The Fed’s September meeting will be pivotal, with officials weighing the soft labor market against inflation that has exceeded their 2% target for more than five years. As the Iran war continues to strain energy supplies and family budgets, the U.S. labor market faces an uncertain path forward.