America's labor market appeared to be gaining momentum this spring. The latest data makes that rebound look much less convincing.

Why it matters: The report isn't as bad as the headline suggests, but the broader picture is still one of a labor market that is less robust than it seemed.

• If the trend continues, U.S. workers might find themselves squeezed on two fronts — a weakening job market and high inflation from an uncertain geopolitical conflict cutting into paychecks and household budgets.

• For the Fed, that combination presents an uncomfortable dilemma. Further labor market weakening could push potential rate hikes further into the future, even as stubborn inflation puts pressure on policymakers to act.

What they're saying: "The stagnant summer air finally caught up with the labor market in July, as job growth slipped back into negative territory and confirmed that spring's optimism was built on shaky ground," Glassdoor chief economist Daniel Zhao wrote this morning.

• "Taken together, July didn't provide the fresh air the labor market needed; instead, workers are still trying to catch their breath in today's muggy job market."

By the numbers: The economy shed 23,000 jobs in July, the first negative month since February. Revisions dramatically weakened the recent jobs picture, wiping more than 100,000 payrolls from May and June.

• The result: The three-month average of monthly job gains has plunged from about 111,000 as of the June report to just 20,000 as of July — a sharp reassessment of the spring and summer trajectory.

Yes, but: The headline decline was heavily distorted by a 50,000 job drop in local government education.

• That sector is prone to seasonal volatility around the school calendar, suggesting the decline may reflect seasonal adjustment noise rather than widespread layoffs.

Zoom out: Those jobs are likely more a statistical quirk than real loss. Yet even adding them back would not have been enough to adequately offset weakness elsewhere.

• Leisure and hospitality shed another 40,000 jobs last month, bringing its two-month decline to 83,000, despite the World Cup spanning much of that period.
• Financial sector employment fell by another 14,000 jobs and is now down 121,000 from its peak last year.
• Health care didn't pick up as much of the slack as usual, adding 22,000 jobs — below its 36,000 average monthly gain over the past year.

The big picture: The unemployment rate fell to 4.1% in July, the lowest jobless rate in a year. But that decline was largely for the wrong reason — people leaving the labor force rather than finding jobs.

• The number of unemployed people fell by 178,000, but the labor force shrank by an even larger amount.
• It was the second straight month of a sizable labor-force decline: The labor force fell 264,000 in July after plunging 720,000 in June — nearly 1 million people out of the labor force in just two months.

There was one modest bright spot: After recent declines, a slightly larger share of prime-age Americans — those 25 to 54 — were working or looking for work in July, and a larger share had jobs.

Between the lines: The jobs report delivered a double whammy for consumers, with weakening hiring and wages failing to keep pace with inflation.

The soft jobs numbers lower the urgency of Fed rate hikes, giving officials who have been on the fence about whether to tighten policy more reason to wait.

• The contingent of officials advocating for immediate rate hikes has made the solidity of the labor market part of their case, and the labor market looks a notch less solid now than it looked at 8:29am ET.

• The market-based odds of a September rate hike fell from 55% to 44% following the release, per CME's FedWatch tool.

Yes, but: With the jobless rate still in the zone of full employment, inflation dynamics are a more central concern in setting rates policy right now than the details of each month's jobs data.

• Before their next policy meeting in mid-September, the officials will have both one additional jobs report (covering August) to take into account as well as two more months' worth of inflation data.

The bottom line: "Today's weak payrolls print may ease the pressure on the Fed to raise rates at its September meeting, but next week's inflation data will still likely be the deciding factor," Ellen Zentner, chief economic strategist at Morgan Stanley Wealth Management, wrote in a client note.

• "If those numbers come in hotter than expected, a cooler labor market may not be enough to quiet the calls for hikes inside the Fed, or lower expectations outside of it."