Economic Indicators: The Sahm Rule and Recession Risks

Unemployment Rate on the Rise

The unemployment rate in the United States has been declining steadily over the past few years, but its rate of increase could be a sign of deteriorating economic conditions. This is where the Sahm Rule comes in.

What is the Sahm Rule?

The Sahm Rule was created by economist Claudia Sahm, who is now the chief economist at New Century Advisors. The rule states that when the three-month moving average of the jobless rate rises by at least a half-percentage point from its low during the previous 12 months, then a recession has started. This rule has accurately predicted every recession since 1970.

Latest Unemployment Figures

According to the latest unemployment figures from the Labor Department’s monthly report, the gap between the three-month moving average of the jobless rate and its low during the previous 12 months has expanded to 0.43 in June from 0.37 in May. This is the highest level since March 2021, when the economy was still recovering from the pandemic-induced crash.

The Creator’s Perspective

Claudia Sahm has explained that even from low levels, a rising unemployment rate can set off a negative feedback loop that leads to a recession. When workers lose paychecks, they cut back on spending, and as businesses lose customers, they need fewer workers, and so on. She also warned that once this feedback loop starts, it is usually self-reinforcing and accelerates.

Pandemic Disruptions

However, Sahm also noted that the pandemic may have caused so many disruptions in the economy and the labor market that indicators like the Sahm Rule that are based on unemployment may not be as accurate right now.

Fed’s Rate Cuts

Sahm told CNBC that the Federal Reserve risks sending the economy into a recession by continuing to hold off on rate cuts. She said that her baseline is not recession, but it’s a real risk, and she doesn’t understand why the Fed is pushing that risk. She also criticized the Fed Chair Jerome Powell’s stated preference to wait for a deterioration in job gains, saying that policymakers should instead focus on the rate of change in the labor market.

Wall Street’s Perspective

On the other hand, Wall Street has had a more sanguine view of the economy, citing last year’s widespread recession predictions that proved wrong as well as the AI boom that’s helping to fuel a wave of investment and earnings growth. Neuberger Berman senior portfolio manager Steve Eisman also pointed to the boost in infrastructure spending, saying that the U.S. economy is more dynamic than it’s ever been in its history.

Conclusion

The Sahm Rule is a valuable tool for predicting recessions, and its recent increase in the unemployment rate gap is a warning sign. While some experts are concerned about the risks of a recession, others are more optimistic about the economy’s prospects. Ultimately, the fate of the economy will depend on the actions of policymakers and the resilience of the labor market.

FAQs

Q: What is the Sahm Rule?
A: The Sahm Rule is a recession-predicting indicator created by economist Claudia Sahm. It states that when the three-month moving average of the jobless rate rises by at least a half-percentage point from its low during the previous 12 months, then a recession has started.

Q: How accurate is the Sahm Rule?
A: The Sahm Rule has accurately predicted every recession since 1970.

Q: What is the current state of the unemployment rate?
A: According to the latest figures, the gap between the three-month moving average of the jobless rate and its low during the previous 12 months has expanded to 0.43 in June from 0.37 in May.

Q: What is the Federal Reserve’s stance on rate cuts?
A: The Federal Reserve has been holding off on rate cuts, despite concerns about the risks of a recession. Claudia Sahm has criticized the Fed’s decision, saying that it is pushing the risk of a recession.

Q: What is the perspective of Wall Street?
A: Wall Street has been more optimistic about the economy, citing last year’s widespread recession predictions that proved wrong as well as the AI boom that’s helping to fuel a wave of investment and earnings growth.

Author: fortune.com

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