WASHINGTON (Reuters) - The U.S. unemployment rate jumped to near a three-year high of 4.3% in July amid a significant slowdown in hiring, heightening fears the labor market was deteriorating and potentially making the economy vulnerable to a recession.

The increase in the unemployment rate from 4.1% in June marked the fourth straight monthly increase, the U.S. Labor Department reported on Friday. It has risen from a five-decade low of 3.4% in April 2023. The labor market is slowing, driven by weak hiring, rather than layoffs, as the Federal Reserve's interest rate hikes in 2022 and 2023 weigh on demand.

The employment report also showed the increase in annual wages last month was the smallest in more than three years, effectively sealing the case for the U.S. central bank to cut interest rates in September.

"The latest snapshot of the labor market is consistent with a slowdown, not necessarily a recession," said Jeffrey Roach, chief economist at LPL Financial. "However, early warning signs suggest further weakness. If the labor market weakens further, markets will likely price in three cuts this year."

Nonfarm payrolls increased by 114,000 jobs last month after rising by a downwardly revised 179,000 in June, the Labor Department's Bureau of Labor Statistics said. Economists polled by Reuters had forecast payrolls would advance by 175,000 jobs after a previously reported gain of 206,000 in June.

Estimates ranged from 70,000 to 225,000. The survey of establishments part of the report also showed employment gains in May were revised down by 2,000. The BLS said Hurricane Beryl, which slammed Texas during the survey week of the July employment report, had "no discernible effect" on the data.

The household survey, however, showed 436,000 people reported that they could not report to work because of bad weather last month, the highest on record for July. The average workweek fell to 34.2 hours from 34.3 hours in June, also suggesting that Beryl had an impact on the labor market.

The healthcare sector continued to lead employment gains, with payrolls rising by 55,000 jobs last month. Construction payrolls increased by 25,000 jobs. There were also employment gains in the transportation and warehousing, social assistance and government sectors.

But information industry payrolls dropped 20,000 jobs.

RATE CUTS EXPECTED

Fed Chair Jerome Powell told reporters on Wednesday that while he viewed the changes in the labor market as "broadly consistent with a normalization process," policymakers were "closely monitoring to see whether it starts to show signs that it's more than that."

U.S. Treasury yields dropped and U.S. stocks opened sharply lower after the data. The dollar fell against a basket of currencies.

Average hourly earnings rose 0.2% last month after climbing 0.3% in June. In the 12 months through July, wages increased 3.6%. That was the smallest year-on-year gain since May 2021 and followed a 3.8% advance in June.

Though wage growth remains above the 3%-3.5% range seen as consistent with the Fed's 2% inflation target, it extended the run of inflation-friendly data.

The Fed on Wednesday kept its benchmark overnight interest rate in the 5.25%-5.50% range, where it has been for more than a year. The central bank, however, opened the door to reducing borrowing costs as soon as its next meeting in September. Financial markets are also expecting rate cuts in November and December.