While unemployment remains at historically low levels, the rate at which it is rising could be a sign of deteriorating economic conditions. That’s where the so-called Sahm’s Rule come in.
It says that when the three-month moving average of the unemployment rate rises by at least half a percentage point from its lowest level in the previous 12 months, a recession has begun. This rule has signaled every recession since 1970.
Based on the latest unemployment figures from the Labor Department’s monthly report on Friday, the gap between the two countries has narrowed. expand to 0.43 in June from 0.37 in May.
The figure is now at its highest since March 2021, when the economy was still recovering from the pandemic-induced collapse.
The creator of the rule, Claudia Sahm, was an economist at the Federal Reserve and is now chief economist at New Century Advisors. She has previously explained that even from low levels, rising unemployment can create a negative feedback loop that leads to a recession.
“When workers lose paychecks, they cut back on spending, and when businesses lose customers, they need fewer workers, etc.,” she wrote in a post. Bloomberg Opinion Column in November, adding that once this feedback loop begins, it often becomes self-reinforcing and accelerating.
But she also said the pandemic may have caused so much disruption in the economy and labor market that indicators like the Sahm Rule based on the unemployment rate may no longer be accurate at this point.
However, a few weeks ago, Sahm told CNBC that the Federal Reserve risks pushing the economy into recession if it continues to delay cutting interest rates.
“My prediction is not a recession,” she said on June 18. “But it is a real risk, and I don’t understand why the Fed is pushing that risk. I’m not sure what they’re waiting for.”
The event comes days after the Fed’s June policy meeting when the central bank left interest rates unchanged after keeping them at 5.25%-5.5% – the highest level since 2001 – until July 2023.
The Fed meets again later this month and is expected to keep its stance unchanged, but the likelihood of a rate cut in September is increasing.
Last month, Sahm also said that Fed Chairman Jerome Powell’s comments about waiting for a slowdown in job growth were a mistake and that policymakers should instead focus on the pace of change in the labor market.
“We went into a recession with all sorts of unemployment,” she explained. “These dynamics feed on themselves. If people lose their jobs, they stop spending, [and] more people lost their jobs.”
Wall Street, meanwhile, has a more optimistic view on the economy, citing last year’s widely misread recession predictions as well as the AI boom that is helping to fuel a wave of investment and earnings growth.
Last month, Neuberger Berman senior portfolio manager Steve Eisman also pointed to the increase in infrastructure spending.
“We’re just trying to get through it, and I think the only conclusion you can make is that the US economy is more dynamic than it has ever been in its history,” he told CNBC.
