At 8:30 PM Beijing time on Friday, the US released blockbuster data: nonfarm payrolls added only 114,000 vs. 175,000 expected, and the unemployment rate hit 4.3% vs. 4.1% expected and prior. This officially triggers the Sahm Rule. The Sahm Rule, proposed by former Fed economist Claudia Sahm, is a recession indicator. It states that when the three-month moving average of the US unemployment rate rises 0.5 percentage points above its low over the prior 12 months, the economy is already in or about to enter the early stages of a recession. Historically, since 1970, the Sahm Rule has correctly signaled all 11 NBER-defined recessions, with a 100% accuracy rate. As of June, the Sahm reading had already risen to 0.43, very close to the 0.5 threshold. If unemployment continues to rise, especially above 4.2%, the rule will be triggered from September onward, raising recession fears. Moreover, based on June data, 20 US states had unemployment rates above the Sahm threshold, representing over 40% of the national labor force.
Let's calculate the Sahm reading after this data release. Here are the historical unemployment rates:
Based on the latest data:
Sahm reading = 0.63% > 0.5%, thus the Sahm Rule is triggered.
It's worth noting that while the Sahm Rule has high historical accuracy, it is not infallible. Claudia Sahm herself has said rules are meant to be broken, and the US economy's resilience may differ due to fiscal policy and market conditions. Therefore, the Sahm Rule should be considered alongside other indicators and market analysis.
As of this writing, the three major US stock indexes opened sharply lower.
UVIX, SQQQ, SOXS — volatility and bearish ETFs — surged across the board.
Popular star stocks also opened weakly.
How much does the unemployment surprise impact recession prospects?
Fed Chair Jerome Powell, in his recent press conference, was asked about the Sahm Rule and its recession prediction. He did not give a direct answer but took a cautious stance, emphasizing that there is no need to overreact to the rise in unemployment.
Powell noted that while high interest rates historically lead to economic slowdowns, the current US economy has unique characteristics. He pointed out that despite traditional recession indicators like the inverted yield curve and the Leading Economic Index (LEI) flashing warnings, the US economy has not yet shown signs of recession.
Powell stressed that the Fed is focused on its dual mandate: bringing inflation down as expected while keeping economic growth strong and the labor market stable. He believes the labor market is returning to better balance, with unemployment remaining low and employment back to pre-pandemic levels.
Powell made clear that the labor market is not currently a source of inflationary pressure, which is why the Fed does not want to see the economy cool too much. However, he also said any signs of labor market weakness would convince the Fed that the economy is not overheating. He reiterated that if there are signs of a significant labor market downturn, the Fed will respond accordingly, adding that policy is ready to address any challenges to its dual mandate.
Risk disclaimer: This content is for informational purposes only and does not represent investment advice. Markets are risky; invest with caution.
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