01 August 2024

Recession Indicators IN FOCUS...Who's "more concerned" than she has been at any point in this cycle that the U.S. could be headed to another recession

A well-regarded economic rule holds that if the unemployment rate rises by half a percentage point quickly enough, the economy is in recession.

Every Rule Has Its Exception. That

May Be

the Case for This Recession Indicator.

By Megan Leonhardt
Aug 01, 2024, 1:15 am EDT

Barron's

2 hours ago

The current jobless rate stands within a hair’s breath of doing that in Friday’s jobs report, and yet even the creator of the rule, former Fed economist Claudia Sahm, doesn’t expect a downturn right away.

The reason is that some of the expansion in the jobless rate could be created by growth in immigration, says Sahm, who currently serves as chief economist for New Century Advisors. Moreover, the unemployment rate is moving from a historic low to a more normal rate.

The Sahm rule is one of several recession indicators that no longer seem to be reliable in today’s postpandemic economy.

The economy was distorted by supply-chain shutdowns, massive government stimulus, and soaring consumer demand that produced high inflation.

Now, the economy is calming, but it still isn’t entirely normal.

Farm Progress

22 hours ago

Is the economy headed for a recession?

None of this means that we should disregard growing unemployment rates. Indeed, Sahm says she’s now “more concerned” than she has been at any point in this cycle that the U.S. could be headed to another recession, though probably not this year.

More precisely, the Sahm rule signals a recession when the three-month moving average of the national unemployment rate rises by 0.5 percentage points or more, relative to its low during the previous 12 months.
The indicator hit 0.43 percentage points in June after the unemployment rate hit 4.1%, on the brink of the threshold.

While triggering the Sahm rule would require July’s jobless rate to hit 4.2%, economists surveyed by FactSet currently believe that the unemployment rate will remain steady at 4.1% this month.

But a 4.2% rate is likely in the coming months as higher interest rates from the Federal Reserve continue to weigh on employers and their hiring plans.

“I expect the unemployment rate to drift up further this year. I expect that the Sahm rule will trigger—we’re not very far from it,” says Sahm.

“But it’s unlikely that come September or October, that the U.S. economy is in a recession.”

Sahm says the rule is likely broken this time around because the pandemic years haven’t followed the normal patterns of a recession and recovery business cycle.

There’s a high likelihood that some of the recent gains in unemployment is being driven by a labor force expansion, led by immigration, she says.

That could be skewing the indicator’s effectiveness.

But it’s also just as clear that there’s some real “garden variety” unemployment increases occurring as well, Sahm says.

So rising unemployment cannot be shrugged off.

Sahm suspects that while the rule’s threshold is currently 0.5 or more, it may need to be shifted higher in this environment to account for the effects of the growing workforce.

Whether that’s just a temporary break or a permanent shift remains to be seen.

“The story is complicated,” Sahm says of the current labor conditions.

“We’ve had this drifting up. It’s not just little blips in the data—this has been going on for a while. So what is it that makes it stop?”

Write to Megan Leonhardt at megan.leonhardt@barrons.com