Monthly job creation turned negative in July for the second time in 2026, marking the second consecutive month that U.S. hiring has widely missed forecasts.

Initial estimates from the U.S. Bureau of Labor Statistics show nonfarm payrolls declined by 23,000 last month. Economist surveys from The Wall Street Journal and Reuters had each forecast around 80,000 job additions.

Friday’s jobs report included hefty downward revisions to prior month estimates, with job gains in June lowered from 57,000 to 20,000. May hiring totals were also slashed to 63,000 from an initial tally of 172,000.

“The July payrolls report delivered a clear downside surprise, though the headline number likely makes the slowdown look somewhat worse than it is,” said Sam Williamson, senior economist at title insurance giant First American Financial Corp., in commentary shared with Scotsman Guide.

Other economists had sharper takes on the payroll report.

“Wage growth continues to decelerate and is below the rate of inflation, a clear tell that the job market is operating below full-employment despite the low unemployment rate,” Mark Zandi, chief economist at Moody’s Analytics, posted on LinkedIn after the BLS release.

The unemployment rate eased to 4.1% in July, the BLS reported Friday, from 4.2% in June and 4.3% over the preceding three months. Millions of jobs remain open and unfilled, however, as declining workforce participation keeps the jobless rate in check and consumers consistently report gloomy outlooks on their job prospects.

Federal Reserve Chair Kevin Warsh called labor markets “steady” and “solid” at a press conference concluding last week’s Federal Open Market Committee meeting, when policymakers voted to hold the federal funds rate unchanged at its current range between 3.5% and 3.75%.

Amid surging inflation since the outset of the Iran war in late February — a trend raising pressure on U.S. central bankers to increase intertest rates — Warsh also noted that the nationwide unemployment rate has “changed little” as job gains have “kept pace with the workforce.”

But workforce participation fell to 61.4% in July, its lowest level since the beginning of 2021, during the heat of the COVID-19 pandemic. Labor force participation has steadily declined since last fall when it hovered around 62.5%, slightly below pre-pandemic averages.

Mortgage Capital Trading, a mortgage consulting firm, flagged the five-year low in workforce participation.

“The data could move the Fed to rethink raising rates next month if labor data continue to lag,” said MCT in daily commentary released Friday, also noting that the jobs data suggests “the labor market may finally be showing some cracks.”

Most of July’s decline came from the services sector, with hiring in leisure and hospitality sectors falling by 40,000 after shedding 43,000 positions in June. Hiring at retailers fell by almost 20,000, while financial sector employment dropped by 14,000.

Federal government employment also contributed to the unexpected downturn, dipping by 53,000 over the month, which Williamson linked to a seasonal decline in government education employment.

“Even so, the recent trends make clear that the labor market has lost some of its recent momentum,” the First American economist noted.

The Federal Reserve has a dual mandate to maintain stable prices and full employment. A growing number of Fed officials have voiced support for hiking rates, as the annual pace of inflation has remained considerably above the bank’s stated 2% target for more than five years.

Growing weakness in the labor market could ultimately change the rate-hike calculus of hawkish Fed officials, even as a low unemployment rate clouds outlooks on the health of U.S. employers.

But the combination of rising inflation and softening job growth is commonly regarded as one of the most difficult policy entanglements for the Fed, as adjusting interest rates higher or lower risks helping one side of its mandate while hurting the other.

“The weaker July employment data might provide a little breathing room for the Federal Reserve as it considers its next policy move,” said Joel Kan, deputy chief economist of the Mortgage Bankers Association (MBA), in commentary shared with Scotsman Guide.

However, Kan added that “inflationary pressures are expected to persist through the remainder of 2026 with no clear end in sight for the war in Iran.” The MBA expects a rate hike to occur by early 2027, with signs of worsening inflation possibly bringing that timetable forward, Kan said.