WASHINGTON — The U.S. economy unexpectedly shed jobs in July, the Bureau of Labor Statistics reported Friday, delivering a surprise decline that immediately shifted market expectations for the Federal Reserve's next interest rate decision even as the unemployment rate ticked lower.

Nonfarm payrolls fell by a seasonally adjusted 23,000 for the month, reversing a downwardly revised gain of 20,000 in June and coming in dramatically below the consensus forecast. Economists surveyed by The Wall Street Journal had expected a gain of roughly 83,000 jobs, while a separate Barron's survey had put expectations closer to 95,000, making Friday's reading one of the more significant misses relative to expectations in recent months.

A Weakening Trend Beneath the Headline Number

The unemployment rate declined slightly to 4.1% from 4.2% in June, even as the labor force participation rate fell further to 61.4%, its lowest level in more than five years. That combination, a falling unemployment rate alongside declining participation, often signals that some workers are leaving the labor force altogether rather than finding new jobs, a dynamic that can flatter the headline unemployment figure while masking underlying softness in the labor market.

Adding to the weak picture, the Bureau of Labor Statistics revised May's job gains down to just 63,000, a reduction of 66,000 from the previous estimate. Taken together with June's downward revision, the string of weaker prints brought the 12-month average pace of job creation down to just 34,000, a sharp deceleration from the........

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