The U.S. unemployment rate rose to 4.3% in July and hiring slowed, adding to signs of a broader downturn in what has been a solid U.S. economy.

The Bureau of Labor Statistics reported Friday that the U.S. added 114,000 jobs, the fewest since December 2020 during the throes of the Covid-19 pandemic. Economists were expecting the unemployment rate to have been unchanged from June’s 4.1% reading.

The report will likely add to worries from some economists that the Federal Reserve has waited too long to cut interest rates in its bid to stamp out inflation. Earlier this week, Fed Chair Jay Powell indicated the first rate cut of the post-pandemic period would come in September, even as many economists flagged signs of a rapidly cooling labor market.

Friday’s report adds further evidence to those concerns.

“Oh dear, has the Fed made a policy mistake?” wrote Seema Shah, chief global strategist at Principal Asset Management based in the UK, in a note to clients following the jobs report’s release. “The labour market’s slowdown is now materialising with more clarity.”

She noted job gains have now dropped below the 150,000 threshold “that would be considered consistent with a solid economy,” and that a September rate cut “is in the bag.”

“The Fed will be hoping that they haven’t, once again, been too slow to act,” Shah said.

Beyond the report’s headline figures were mitigating factors and other signs that the economy remains on relatively firm footing.

Much of the increase in the unemployment measure was driven by temporary layoffs, while the BLS indicated that weather-related factors had temporarily increased the ranks of those who still hold jobs but were technically not at work during the month.  

Meanwhile, wage gains continued to outpace inflation — continuing a trend that has now taken hold for months — and more people rejoined the workforce last month, something reflected in an increased labor force participation rate.

Yet outside of health care, construction and some transportation and warehousing roles, there was little meaningful job growth, with manufacturing adding just 1,000 to its payrolls and professional and business services positions declining by 1,000.

“Even a few months ago, the labor market seemed fine, the trajectory looked stable,” said Guy Berger, director of economic research at the Burning Glass Institute, a think tank. “Today, things look a bit shakier.”

While Berger doesn’t see an imminent recession, it wouldn’t take much for the gradual downturn to become a more significant one, he said.

The Federal Reserve doesn’t envision that outcome — and in fact is largely in control of it, economists say.

On Wednesday, the Fed announced that it was leaving its key interest rate unchanged at about 5.5% even as Powell said a cut at its next meeting was “on the table.”

By cutting interest rates, the central bank would reduce the cost of borrowing for goods and services, which would result in lower monthly payments for consumers and businesses alike who are subject to variable annual percentage rates.

In turn, demand and hiring are likely to increase throughout the economy.

On average, companies are hanging on to their current workers — something reflected in the rate of layoffs’ falling to a record low.

Yet the hiring rate has also fallen to a level not seen since the onset of the pandemic — and before that, 2014.

The upshot: If you have a job, you’re unlikely to lose it these days, barring some exceptions.

But you’re going to struggle if you’re looking for a new one.

The Fed therefore believes it can put a floor underneath the labor market that prevents it from deteriorating further, Berger said.

While there is reason to believe it can accomplish that, there is an alternative view that it is already behind the curve and should have cut interest rates by now.

“Historically, deteriorating labor markets generate a self-reinforcing feedback loop,” former New York Federal Reserve President Bill Dudley wrote in a Bloomberg News op-ed last week. “When jobs are harder to find, households trim spending, the economy weakens and businesses reduce investment, which leads to layoffs and further spending cuts.” 

Another worrying sign: The job growth that is occurring has been in an exceptionally narrow range of occupations, like health care and, to a lesser extent, government, particularly at the state and local levels.