In a new twist, the US economy added 114,000 jobs last month, significantly missing economist estimates of 175,000. Despite the newly added jobs, the unemployment rate has grown to 4.3% from 4.1%, as against the predictions that it would stay flat.
Former Federal Reserve official Claudia Sahm established the Sahm rule, which is triggered when the three-month moving average of the unemployment rate jumps to 50 basis points above its yearly low. This rule was activated as the moving average increased by 53 basis points above that one-year trough, according to the real-time Sahm Rule Recession Indicator from the St. Louis Federal Reserve.
This is a concerning sign for the broader US economy, as the Sahm rule has an impressive track record of predicting an imminent downturn. Since 1953, excluding the current instance, the Sahm rule has been signaled 11 times, and in 10 of those cases, the economy was already in a recession. The only exception was in 1959, but even then, a recession began just five months after the Sahm rule signal.
However, Sahm herself noted in a Substack post last week that “the rise in the unemployment rate is not as ominous as it would normally seem.” She mentioned earlier this year that if her rule were ever to fail in predicting a recession, this might be the time. The recent increase in the unemployment rate has been driven not by job layoffs but by a rise in labor supply due to immigration trends.
Sahm, truly, after that, the risk of a recession in the next several months skyrocketed. She also thought that this should move the US central bank to have interest rates, which could help mitigate some recessionary pressures.
Investors are becoming very concerned, although Sahm may not be really worried about an immediate recession at this stage. The stock market dipped over 2% on Friday following the disappointing jobs update.
