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Stocks soar, Nvidia gains 12% as Fed, Powell pave way for September rate cut
If Friday’s July jobs report reveals that the unemployment rate rose to 4.2% during the month, the Sahm Rule would be triggered.
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.
But how do we recently noticedEconomists, 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.
On Wednesday, when asked directly whether triggering the rule would be a concern, Fed Chairman Jerome Powell clarified that the Sahm Rule is a “statistical regularity,” not an “economic rule that says something should happen.”
“We look at all the things we’re seeing,” Powell said. “And what it looks like is a normalized labor market.”
Powell also weighed in on the list of recession indicators that have not proven accurate during the current economic cycle, noting that “history doesn’t repeat itself; it rhymes.”
“Let us remember that this pandemic era was an era in which many apparent rules were disregarded, such as inverted yield curveto begin with,” Powell said. “So many perceived pieces of wisdom just didn’t work.”
Powell highlighted the unique inflation situation since the pandemic lockdown, where supply has been constrained while demand has soared, as a reason why the current economic situation is different from the past.
“The whole situation is not the same as many other previous inflation crises [spikes] or recessions that we’ve seen or business cycles that we’ve seen,” Powell said. “So we’re having to learn to be very careful about the judgments that we make.”