Unemployment declined from 7.6 percent in June because more Americans found jobs, and others stopped looking and were no longer counted as unemployed.
Still, Friday's report from the Commerce Department pointed to a less-than-robust job market. It suggested that the economy's subpar growth and modest consumer spending are making many businesses cautious about hiring.
Employers created a combined 26,000 fewer jobs in May and June than previously estimated. Americans worked fewer hours in July, and their average pay dipped. And many of the jobs employers added in July were for lower-paying work at stores, bars and restaurants.
For the year, job growth remains steady. The economy has created an average 200,000 jobs a month since January, though the pace has slowed in the past three months to 175,000.
Friday's jobs report "reveals a mixed labor market picture of continued improvement, but at a still frustratingly slow pace," said Scott Anderson, chief economist at Bank of the West.
Reaction in financial markets was slightly negative. The Dow Jones industrial average dropped 60 points in midmorning trading, and broader stock indexes also declined. The yield on the 10-year Treasury note fell to 2.62 percent from 2.71 percent.
The Federal Reserve will review the July employment data in deciding whether to slow its $85 billion a month in bond purchases in September, as many economists have predicted it will do.
Weaker hiring could make the Fed hold off on any pullback in bond buying, which has helped keep long-term borrowing costs down. Yet it's possible that the lower unemployment, along with the job gains the past year, will convince the Fed that the job market is strengthening consistently.
"While July itself was a bit disappointing, the Fed will be looking at the cumulative improvement," said Paul Ashworth, chief U.S. economist at Capital Economics. "On that score, the unemployment rate has fallen from 8.1 percent last August, to 7.4 percent this July, which is a significant improvement."
But Beth Ann Bovino, senior economist at Standard & Poor's, said she thinks Friday's report will make the Fed delay any slowdown in its bond purchases.
"September seems very unlikely now," she says. "I'm wondering if December is still in the cards."
The government's revised totals show that May's job growth was downgraded to 176,000, below the 195,000 previously estimated. June's was lowered to 188,000, from the 195,000 reported last month.
July's decline in unemployment to 7.4 percent was derived from a survey of households, which found that 227,000 more people said they were employed. And 37,000 people stopped looking for work and were no longer counted as unemployed.
The job gain for the month was calculated from a separate survey of employers.
Though much of July's job growth was in lower-paying industries, manufacturing, a generally good-paying sector, added 6,000 jobs. That growth was driven by gains at auto plants. Those were the first job gains at U.S. factories since February.
Jobs in professional services such as finance, accounting and information technology also rose.
Governments added jobs for the first time since April, driven by the fifth straight month of hiring by local government.
Job gains are being slowed by the economy's tepid growth. It grew at an annual rate of just 1.7 percent in the April-June quarter, the government said this week. That was an improvement over the previous two quarters, but it's still far too weak to rapidly lower unemployment.
Recent data suggest that the economy could strengthen in the second half of the year. A survey Thursday showed that factories increased production and received a surge of new orders in July, propelling the fastest expansion in more than two years.
The survey, by the Institute for Supply Management, also showed that the housing recovery is spurring more output by lumber companies, furniture makers and appliance manufacturers.
Businesses have ordered more industrial machinery and other equipment for four straight months. Europe's troubled economies are showing signs of recovery, potentially a lift to U.S. exports.
U.S. automakers are reporting their best sales since the recession, a sign that Americans are confident enough in their finances to make large purchases. Car sales rose 14 percent in July from 12 months earlier to 1.3 million.
Healthy sales have encouraged more hiring by Ford Motor Co. The company said last week that it will hire 800 salaried professionals this year, mostly in areas such as information technology, product development and quality control.