US unemployment data triggers Sahm Rule recession warning, but rule inventor says recession may not come

The Sahm Rule, which has a consistent accuracy rate of 100% going back to every recession since the early 1970s, is reading at 0.53% currently

Growing US unemployment figures in July sent global stock markets tumbling due to fears of recession in the US, and has triggered the Sahm Rule, an indicator used to detect the onset of recessions. However, Claudia Sahm, the inventor of the rule, says a recession may not actually be underway, in an interview with Fortune.

A sign for Wall Street outside the New York Stock Exchange in Manhattan in New York City, New York, U.S, October 26, 2020. (Mike Segar/Reuters)

“I am not concerned that, at this moment, we are in a recession,” she told Fortune, and added that “no one should be in panic mode today, though it appears some might be.”

What is the Sahm Rule?

The Sahm Rule is an economic indicator created in 2019 by former US Federal Reserve Economist, Claudia Sahm. It is used to identify the onset of a potential recession in the US using labour conditions indicated by the unemployment rate.

According to the rule, a recession may be coming when the three-month moving average of the national unemployment rate rises by 0.50 percentage points or more when compared to its low during the previous 12 months.

The Sahm Rule reading is 0.53% currently. In June, it was 0.43%.

Another point to note is that the Sahm Rule’s accuracy rate has consistently been, 100% going back to every recession since the early 1970s.

What were the US unemployment figures in July?

The US added only 114,000 jobs in July, with the unemployment rate rising from 4.1% in June to 4.3% in July, which was the highest in nearly three years, according to data released by the US Bureau of Labor Statistics.

How did markets react to the US unemployment rate?

The Dow Jones industrial average sank 1.5% on Friday, the S&P 500 and the tech-heavy Nasdaq Composite plunged 1.8% and 2.4%, respectively.

Why does Sahm feel a recession may not be happening?

Sahm, who currently serves as chief economist at investment firm New Century Advisors noted that household income is still growing and consumer spending and business investments still remain resilient. She also added that the unemployment figures may also have been tempered by 420,000 workers who entered the labor force last month.

How will the potential recession impact the Fed's interest rates?

Sahm said that though she doesn't believe a recession is coming, the possibility shouldn't be dismissed entirely.

The US Fed hiked rates from nearly zero in March 2022 to between 5.25-5.5%, where it has been for a year. This was an attempt to cool the economy and slow the rising consumer prices.

Fed Chair Jerome Powell had told reporters on Wednesday that he was “carefully” lookin for downturn signs in the labour market. “What we think we’re seeing is a normalizing labor market, and we’re watching carefully to see if it turns out to be more; [if] it starts to show signs that it’s more than that, then we’re well-positioned to respond,” he said.

“If we continue to get economic data that shows this broad slowing, then I suspect that the decrease in interest rates will be larger than we thought, maybe even as of Wednesday,” Sahm said.