U.S. Economy Loses Jobs in July as Hiring Slows, Rate Hike Outlook Shifts

WASHINGTON, Aug. 7 (Reuters) — The U.S. economy unexpectedly lost jobs in July, while employment figures for the previous two months were revised sharply lower, adding to concerns over the strength of the labor market and reducing expectations of an interest rate hike by the Federal Reserve next month.

The Labor Department said nonfarm payrolls fell by 23,000 jobs in July, compared with economists' expectations for an increase of 80,000 jobs. Payroll gains for May and June were also revised down by a combined 103,000 jobs.

Despite the decline in hiring, the unemployment rate eased to 4.1% from 4.2% in June, largely because 264,000 people left the labor force. The labor force participation rate fell to 61.4%, its lowest level in nearly five and a half years.

The report points to a slowdown in hiring that could influence the Federal Reserve's next policy decision. Financial markets reduced the probability of a September interest rate increase following the data, though next week's inflation report is expected to play a key role in determining the central bank's course.

Job losses were led by a decline of 50,000 positions in local government education, while the retail sector shed 19,000 jobs and financial services employment fell by 14,000.

Healthcare remained one of the few sectors to add jobs, increasing payrolls by 22,000, although that was below the average monthly gains recorded over the past year. Employment in the construction and manufacturing sectors was largely unchanged.

Economists said the weaker-than-expected jobs report may reduce pressure on the Federal Reserve to raise interest rates in September, but stressed that inflation data due next week will likely be the deciding factor for future monetary policy.