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Jobs report could trigger closely watched recession indicator
Other recession indicator is almost flashing red.
O Sahm’s ruledeveloped by economist Claudia Sahm, says the U.S. economy has entered a recession if the quarterly average of the national unemployment rate has increased by 0.5% or more from the low of the previous 12 months. The rule has successfully predicted recessions 100% of the time since the early 1970s.
If Friday’s July jobs report reveals that the unemployment rate rose to 4.2% during the month, the Sahm Rule would be triggered.
But economists, including Sahm herself, are cautious about such a result being used to conclude that a recession is imminent for the U.S. economy, given the current economic climate.
“The rising unemployment rate is not as threatening as it usually seems,” Sahm wrote in a July 26 post on Substack.
Sahm argues that the current rise in unemployment fails to account for recent changes in the labor market that were not as common in previous instances in which the Sahm Rule was triggered, including pandemic distortions in labor force participation and a massive increase in immigration.
“In past recessions, the share of entrants—those with no work history or those returning to the labor force—has fallen,” Sahm wrote. “Weakening labor markets discourage them from looking for work. Today, the share of entrants has not changed. This would be consistent with the increased supply of immigrant labor increasing unemployment, not a sign of weakening demand, as is typical in a recession.”
Bank of America Securities’ Head of U.S. Economics Michael Gapen recently told Yahoo Finance He also does not see the Sahm rule as a useful tool for recession in the current economic climate.
“The unemployment rate is rising largely because labor force growth from immigration is outstripping the demand for labor,” Gapen said.
For now, Gapen said, the recent increase on unemployment is not a story about companies cutting costs through more layoffs.
Asked whether he was concerned about the Sahm rule being triggered at a news conference Wednesday, Federal Reserve Chairman Jerome Powell said: “The question really is whether we are concerned about a sharper slowdown in the labor market. The answer is we are watching it carefully.” He characterized the rule as a “statistical regularity.” “It’s not like an economic rule that tells you something should happen.”
The July jobs report will be closely watched by Wall Street. (Orjan F. Ellingvag/Dagens Naringsliv/Corbis via Getty Images) (Orjan F. Ellingvag via Getty Images)
In the last edition of Yahoo Finance Chartbookthe Yardeni research team presented an alternative version of the Sahm rule that attempts to adjust for the influx of immigrant workers.
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Yardeni Research chief market strategist Eric Wallerstein opts to use the insured unemployment rate from weekly jobless claims data, which excludes new workers entering the labor force.
With this data, Wallerstein noted that there is “little reason to worry that the labor market is crashing.”
Even with the rule creator and others pointing out that a trigger for the Sahm rule in the July jobs report may not be the end of it, market participants still think it could be significant for Friday’s market action.
Blake Gwinn, head of U.S. rates strategy at RBC Capital Markets, wrote in a note to clients on Monday that such an event would cause negative sentiment to “be turbocharged” and he expects markets to quickly price in higher odds of a hard landing for the economy.
“We believe that an implementation of the Sahm rule this week would be less significant than in the past, given the constellation of labor market data — but that won’t matter on Friday, and we wouldn’t expect much sympathy for that view,” Gwinn wrote.
Josh Schafer is a reporter for Yahoo Finance. Follow him on X @_joshschafer.
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