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America’s robust post-pandemic job market is teetering on the brink after a lousy July hiring report in which the unemployment rate shot up to 4.3%, a three-year high.

The Federal Reserve now has egg on its face after it kept interest rates near a quarter-century high earlier this week. And for the everyday US consumer, economic pain could be coming down the pike as hiring slows — but lower interest rates for homes and credit cards could be on their way in just a few months.

The government’s latest jobs report on Friday fell way short of expectations: Employers added just 114,000 jobs in July, compared to the 175,000 gain economists estimated in a FactSet poll. 

Paychecks are also in a slump: Wage growth, as measured by average hourly earnings, continued to decelerate in July, logging its weakest annual rate since May 2021.

By now, there’s ample evidence that the job market, a key driver of the US economy, has lost steam. A separate report earlier this week showed that job openings fell in June to the second-lowest level since March 2021. New applications for unemployment benefits, a proxy for layoffs, rose last week to the highest point in a year. Today’s US labor market looks way different from just two years ago when monthly payroll growth was on a tear and employers had a record 12.2 million job vacancies as the broader economy continued with its stunning ascent from pandemic depths.

So, should you be worried? Sure. But don’t panic. The US economy remains fairly strong, and there’s reason to be hopeful about America’s ability to avoid a recession.

Here are three reasons to be worried about July’s shockingly weak jobs report — and one silver lining.

The unemployment rate in July officially triggered the “Sahm rule,” a well-known recession indicator developed by American economist Claudia Sahm, who worked at the Fed for more than a decade. The rule posits that whenever the unemployment rate as a three-month average rises 0.5 percentage points from the lowest point in the past 12 months, then that means the economy is in the early signs of a recession. Since January, it has risen by 0.6 percentage points, so the runup in the jobless rate has been pretty quick.

Sahm told Bloomberg on Friday that the unemployment rate has seen “way too much momentum,” adding that the job market is seeing “a substantial weakening.”

But in today’s history-defying economy, conventional wisdom has sometimes proven useless. Elizabeth Crofoot, senior economist at labor analytics firm Lightcast, told my colleague Alicia Wallace on Friday that lingering effects from the Covid-19 pandemic have rendered many rules useless. Fed Chair Jerome Powell said as much Wednesday when he took questions from reporters over the central bank’s latest decision to hold interest rates steady for the eighth time in a row.

“I’m very hesitant to use the ‘R’ word (recession), because I don’t think we’re there; but this is something to keep our eye on,” Crofoot said.

In fact, some economists are still feeling confident about the US economy’s chances of ridding itself of high inflation without a recession, an exceptionally rare feat known as a soft landing, which has only happened once, in the 1990s.

“A soft landing is still the most likely outcome,” Michael Gapen, chief US economist at Bank of America, told my colleague Matt Egan.

Don’t peek at your 401K retirement account: Friday’s disappointing employment report triggered a mass selloff on Wall Street.

All three major stock indices sank after the latest jobs data pointed to a broad labor market slowdown. The Dow closed 612 points lower, or 1.5%; the tech-heavy Nasdaq Composite shed 2.4% and the S&P 500 declined 1.8%.

Investors weren’t nearly as spooked by softer-than-expected economic data in recent months, because some weakness meant that the Fed could soon begin to lower interest rates. But the Fed has already signaled that it will likely begin to lower borrowing costs in the coming months following a slew of cooling inflation data. Any more weaker-than-expected economic data could spur concerns the US economy is faltering, with a recession perhaps lurking in the background.

Bad news on the economy now seems like bad news on Wall Street. Investors want interest rates to come down because inflation has cooled enough — not because the economy is at risk of a downturn.

Still, some investors say that Wall Street’s sour mood on Friday could be an overreaction. CNN’s Fear & Greed Index, a measure of market sentiment, fell to 27 — close to “Extreme Fear.” It was in “Neutral” territory just one week ago.

“It feels a little panicky,” Truist’s Keith Lerner said. “The market has a lot of things to digest at once. And that makes it hard to get confidence.”

Consumer spending, which makes up about 70% of the US economy, is heavily influenced by the state of the job market. If Americans are having a hard time finding a new job, then they’ll be forced to spend more carefully or cut back outright.

And if workers are being laid off, then that could really worsen things, but the recent uptick in unemployment was partly due to more people entering the workforce. The Labor Department’s latest report on churn in the job market, released Tuesday, showed that layoffs and discharges actually declined in June, remaining well below pre-pandemic levels.

Consumer demand itself also hasn’t weakened just yet, despite the highest interest rates in more than two decades. Last week’s report on gross domestic product showed that a key gauge of demand in the economy climbed from April through June, compared to the prior three-month period.

But at this point, it’s unclear whether the job market will end up taking a turn for the worse, and if it does, then America’s economic engine could soon start to crack.

“The risks are decidedly to the downside for the labor markets, and rising joblessness could drag the entire economy under,” Chris Rupkey, chief economist at FwdBonds, said in a note Friday.

The one silver lining from the ugly July jobs report is that it essentially cemented the first interest rate cut in September, and it also raised the odds that the Fed could roll out an even bigger rate cut than anticipated. That would usher in lower borrowing costs on everything from mortgages and car loans to credit cards.

The Fed’s latest policy statement on Wednesday said the central bank is now wary of any risks to the US job market, and suggested that inflation has become less of a concern in recent months. The Fed is now attentive to both sides of its so-called dual mandate of stabilizing prices and maximizing employment. This shifted view of the economy is setting the stage for the Fed to begin lowering borrowing costs as soon as September.

Some prominent economists said the Fed should have lowered rates this month, such as former Fed Vice Chair Alan Blinder and Nobel prize-winner Paul Krugman but, clearly, America’s central bank shrugged off those calls. Now, analysts at Citigroup and JPMorgan are expecting the Fed to end up cutting rates by half a point in both September and November to make up for some lost ground.

Generally, the Fed makes its decision congruent with what’s going on with inflation or the job market. In summer 2022, when inflation was running at 40-year highs, the Fed was hiking by three-quarters of a point, and during the Great Recession, the Fed cut rates by three-quarters of a point at several meetings.

There is one more jobs report before the Fed’s September 17-18 meeting, and if unemployment rises even higher, the central bank may need to cut more aggressively.