US recession indicator flashes red

August 04, 2024 (MLN): The US unemployment rate rose to the highest level in nearly three years, triggering a recession indicator that has accurately signaled nearly every US recession since at least 70 years.

The Sahm Rule recession indicator, developed by former Federal Reserve economist Claudia Sahm, signals the start of a recession when the three-month moving average of the unemployment rate rises 0.5 percentage point above its low from the previous 12 months.

That threshold was breached when July's unemployment rate rose to 4.3%. The indicator reading jumped to 0.53% from 0.43% in June, according to Federal Reserve Economic Data.

However, Claudia Sahm herself noted in a recent interview that "this time really could be different," saying that the US is not necessarily in a recession.

Sahm said that the US labor market experienced significant shocks due to the COVID-19 pandemic.

She explained that the US faced labor shortages earlier when people dropped out of the labor force because of the pandemic, causing the unemployment rate to drop unusually low.

"So we're comparing to something really low," she said.

Furthermore, in recent years, the country has seen a significant surge in immigration, which means people are entering the labor force from the sidelines.

"It takes time to find a job if you're coming in from the sidelines," Sahm said.

"This pushes up the unemployment rate, and as long as it does that temporarily, that is not a cause for concern," she said.

Though saying now is not the time to panic, Sahm also cautioned that recent trends in the labor market indicate it is substantially weakening.

She also said the Fed should have cut rates this week. “Waiting two more months may make it harder to cut gradually and could create unwarranted urgency,” she warned on Wednesday.

(Header image generated with AI)

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