The labour market has not cooled. It has been weakened by policy.

THE AMERICAN economy shed 23,000 jobs in July, the Bureau of Labour Statistics reported on August 7th. The loss was a surprise. Economists surveyed by Dow Jones had expected a gain of 83,000. The preceding two months were revised down by a combined 103,000, dragging the year-to-date monthly average to 60,000. To put that in context: a healthy American labour market typically adds 150,000 to 200,000 jobs a month.

The headline number is the least of it. The unemployment rate fell to 4.1% from 4.2%, but only because the labour-force participation rate dropped to 61.4%, its lowest since February 2021. Over 2m people have left the labour force since last November. Wage growth, at 3.2% year-on-year, has fallen below the consumer-price inflation rate of 3.5%. Workers are not merely finding it harder to get jobs. Those who have them are falling behind in real pay.

This is not a cyclical cooling. It is the result of several policy shocks that have arrived together.

The first is trade. The Trump administration's sweeping tariffs—spanning steel, aluminium, cars, pharmaceuticals and, most recently, a 50% levy on Canadian imports—have raised the effective US tariff rate to 6.6%, the highest since 1969, according to the Tax Foundation. A Senate minority analysis finds that average monthly job growth fell by roughly 100,000 in the months following the tariff announcements , according to a Senate minority analysis. The Federal Reserve Bank of Kansas City estimated that direct tariff effects reduced monthly hiring by around 19,000 from January to August 2025 , according to a Federal Reserve Bank of Kansas City analysis. Tariffs were supposed to bring manufacturing jobs home. They have instead raised input costs for firms that consume more steel than they produce and given exporters a foreign-price penalty. The result is less output, not more.

The second shock is energy. The war in Iran, which began in late February with the halting of shipping through the Strait of Hormuz, removed roughly one-fifth of the world's oil supply from the market , removing roughly one-fifth of the world’s oil and gas supply from the market. Though a memorandum of understanding signed in June has allowed traffic to resume cautiously, the damage was done. Average regular gasoline stood at $4.04 per gallon in July, up 36% since the end of February. As the IMF noted in March, every scenario for prolonged energy disruption leads to higher prices and slower growth , as the IMF noted in March. Higher transport and input costs squeeze margins across industries that have nothing to do with oil. When margins shrink, hiring is the first thing to slow.

The third shock is demographic. Tighter immigration policy, pursued alongside the tariffs, has reduced the inflow of workers at a time when the native-born population is ageing. A smaller labour force does not improve unemployment statistics; it reduces the economy's capacity to grow. The 2m workers who have exited since last autumn are not hiding in full-time jobs. They are gone.

The labour market showed the same pattern in February, when 92,000 jobs were lost and the unemployment rate rose to 4.4% , when the unemployment rate increased to 4.4%. At the time, economists pointed to temporary drags: a Kaiser Permanente strike in Hawaii and California that sidelined more than 30,000 health-care workers during the survey week, winter weather that froze construction, and a one-off seasonal blip. Jefferies's Thomas Simons called it a "perfect storm" rather than a trend. The White House insisted the economy remained "really strong". These dismissals are now harder to sustain.

What has changed is not just the headline. Health-care, the single largest source of job creation over the past year, added only 22,000 in July, well below its 12-month average of 36,000. The information services sector, which has shed an average of 5,000 jobs per month over the past year as artificial intelligence reshapes employment, continues to contract. Retail lost 19,000 jobs. Financial activities shed 14,000. The sectors that should be absorbing displaced workers are themselves retreating.

The Federal Reserve is caught between these weaknesses and the inflation they help create. At its July meeting the FOMC voted 9-3 to hold rates steady at 3.5% to 3.75%. Three dissenters—Beth Hammack, Neel Kashkari and Lorie Logan—wanted a 25-basis-point increase. Chair Kevin Warsh said jobs data had "been moving in a good direction". On the evidence available when he spoke, that was defensible. July's report changes the picture. The odds of a September rate hike fell from above 50% to around 40% after the data , as Kiplinger noted, and the S&P 500 rose 0.6% as investors welcomed the implication that further tightening was unlikely.

The trouble is that the Fed's dilemma is a reflection of policy failure, not a puzzle to be solved with more patience. Tariffs raise prices and slow hiring. An energy shock does the same. Immigration restrictions shrink the labour force. The Fed is being asked to respond to supply-side damage with a demand-side tool. It cannot fix what it did not break.

To be sure, a single month does not make a trend. July can be noisy: seasonal swings in local-government education employment, which lost 50,000 jobs in part because summer holidays fall during the survey period, can exaggerate the headline. And the household survey, which counts participation and unemployment, often moves in the opposite direction to the establishment survey that counts payrolls. The two do not always agree.

Yet the direction of travel is unmistakable. The 12-month average for job creation is now 34,000, far below the pre-shock norm. The three-month average is even lower once revisions are accounted for. Wage growth is running below inflation. Participation is at its lowest in five years. These are not the signatures of an economy that is cooling gently. They are the signatures of an economy that is being constrained.

The better answer is not monetary. It is to remove the constraints. Tariffs that cost more jobs than they protect ought to be unwound. Energy security is worth pursuing, but not at the cost of permanently higher consumer prices. Immigration policy can be reformed without halting the flow of workers entirely.

The Federal Reserve's task is now to avoid compounding the damage. A rate hike in September would be a mistake: it would slow an economy that has already been weakened by fiscal and trade policy. But neither should investors and policymakers treat the labour market's decline as a reason for comfort. A weaker labour market is not a soft landing. It is the opposite of what policymakers claimed they wanted.

That bargain is breaking.