Hiring suffers a blow

August 7, 2026

Demand and supply of workers are falling in tandem, a toxic mix for the Fed. Payroll employment fell by 23,000 in July, after downward revisions to June. Private payrolls rose, but not enough to offset a 53,000 drop-in public-sector employment. 

The losses in the public sector were concentrated in local education. Enrollments are falling, with 2026 marking the peak year for 18-year-olds. State and local government coffers are being squeezed by a slowdown in revenues, cuts to SNAP funding and a shifting of the burden for Medicaid and disaster assistance from the federal government. 

Federal payrolls fell by 3,000, despite staffing shortages and funds approved for new hires. Federal employment is now hovering near a 1966 low.

Private sector employment added 30,000 jobs, which is still anemic. Healthcare and social assistance added 22,600 jobs, the smallest gain since a drop in employment in February. The pace of hiring, which had been the backbone of employment gains, is slowing as Medicaid cuts by some states and the loss of immigrant labor suppress overall gains. 

The weakness was concentrated in social assistance, which includes the care economy and is among the most dependent on immigrant labor. The Temporary Protected Status of more than 330,000 immigrants lapsed at the end of July; about 200,000 were workers. 

Some employers appear to have cut workers early because of confusion over the timing of the change. Those losses could show up as a drag on August employment but a rise in job postings, as many affected workers are no longer eligible to work or collect benefits.

Another cliff will be reached in October, when more Venezuelan workers lose TPS. The sectors most at risk include leisure and hospitality, elder care and construction. Florida is home to the largest population of TPS workers; local shortages there could become acute.

Construction added 22,000 jobs, supported by gains in specialty nonresidential workers. That is in response to data center construction, which has caused pockets of labor shortages in the specialty trades.  

Professional and business services added 18,000 jobs, after adding 34,000 in June. Full-time rather than temporary hires drove those gains. Hiring is stronger in areas tied to AI, cybersecurity, data infrastructure and compliance.

Information added 11,000 jobs, driven by gains in motion picture and sound recording. The tech sector added only modestly to job gains, after shedding jobs earlier in the year.

Manufacturing added 5,000 jobs for the second month in a row. However, job gains in April and May were revised away. The gain was concentrated in motor vehicles and parts. Vehicle sales picked up in June and July, which drained inventories. Nondurable goods manufacturing shed jobs across the board. Food processing relies heavily on immigrant labor, which likely contributed to those losses.

Leisure and hospitality lost 40,000 jobs, adding to the 43,000-drop last month. The losses were concentrated in food and drinking establishments. That reflects both weak supply and demand for workers.  

Supply is constrained by the loss of immigrant labor, while higher prices at the gas pump have added to the squeeze on low- and middle-income households. Eating out has been among the harder-hit categories since the start of the conflict in the Middle East.

Retail trade lost 19,400. Almost all of that loss happened in warehouse clubs and super centers. Big-box discounters have reported softness in demand. A move downstream by upper-income households has not been enough to offset those losses.

Financial services lost 14,000 jobs, with the largest losses in credit intermediation and insurance. Mortgage demand remains weak, with the housing market still frozen. 

Average hourly earnings rose a tepid 0.1% in July, after rising 0.3% last month. That translates into a 3.2% gain from a year ago, a slowdown from the 3.4% we saw last month. The weakness in wages showed up in retail trade, financial activities and education. Hours worked held at 34.3 for the month.  

Wage gains for occupations tied to data centers in the states with the largest concentration of those centers are accelerating. The professions most affected include specialty contractors.

The unemployment rate fell to 4.1% on another loss in the participation rate, which dipped to 61.4%, the lowest since emerging from the pandemic in February 2021. That is the second blow to labor force participation in two months. The losses occurred among young women and those over the age of 55. Participation among 25- to 54-year-old women rose slightly.

The unemployment rate among new college graduates, a cohort dominated by women, lags the employment report. However, we saw the spread between the overall unemployment rate and the rate for new college grads rise to its highest level since the early 2010s in June. Most college grads blame AI for taking their jobs, but the current weakness is more a residual of the low-hire, low-fire environment than a clean read on AI displacement.

Aging demographics and curbs on immigration are limiting the number of people looking for work or eligible to work. We will be in the peak years for baby-boomer retirements through 2028, while the traditional college-age pipeline is cresting: high school graduates peaked around 2025 while the number of 18-year-olds will peak around this year before moving lower. 

The U-6 unemployment rate held at 7.9%, another reminder that slack is broader than the headline rate suggests. Part-time workers who would prefer full-time work and those marginally attached to the labor force are still feeling the strain. We are back in a world of insiders and outsiders: those with jobs are clinging to them, while those without jobs are struggling to get a foot in the door. 

The duration of unemployment fell by less than a week. There was a exodus of those who were unemployed more than 27 weeks, which helped on the margins. There are still nearly 1.8 million workers who have been unemployed for more than 27 weeks. 

Those who were out on vacation in July fell to the second lowest on record for the month. We have not seen anything like this since the pandemic. Again, higher prices at the gas pump are adding to weakness in discretionary spending. The FIFA World Cup finished and exacerbated the losses. The Federal Reserve’s Beige Book revealed that what little gains we saw in hiring prior to the games were only in host cities.

Those out due to parental leave reached the second highest July on record. The highest was last year.