The US economy suffered an unexpected setback in July as hiring fell sharply and the unemployment rate rose for the fourth straight month with sustained higher interest rates taking a toll on businesses and consumers.

Friday’s report from the US Labor Department showed that employers added just 114,000 jobs in July – 35 percent fewer than forecasters had expected – and that unemployment, now up to 4.3 percent, was the highest since October 2021.

“Things are deteriorating quickly,’’ said Julia Pollak, chief economist at the job marketplace ZipRecruiter.

The news shook financial markets around the world, with the Dow Jones and the Nasdaq both dropping sharply at the open of trade.

The sturdiness of the US economy — the world’s largest — has been a key driver of global economic growth and the US jobs market is a big reason for it, underpinning the American expansion and giving consumers the confidence and financial wherewithal to keep spending.

The unemployment rate's jump to 4.3 percent in July crossed a tripwire that historically has signalled that the United States is in recession — though economists say the gauge probably is not reliable in the topsy-turvy post-pandemic economy.

The weak jobs report came two days after the Federal Reserve said it would hold off on cutting interest rates until it sees more evidence that inflation is continuing to move down and closer to its 2 percent target.

Fed Chair Jerome Powell characterised the American job market as healthy, despite growing calls for the central bank to begin lowering its benchmark rate, which stands at a 23-year high, to pre-empt a major weakening of the US economy and job market. (AP)