In the United States, the unemployment rate in June almost reached a key indicator of economic downturn known as the Sahm Rule. Economist Claudia Sahm proposed that when the three-month moving average of the unemployment rate is at least 0.5 percentage points higher than its low point over the past 12 months, it is considered the beginning of an economic recession. This rule has successfully predicted every economic recession in the United States since 1970.
According to the latest unemployment rate data released by the Department of Labor last Friday (July 5th), the unemployment rate in June rose to 4.1%, up from 4% previously. The difference between the three-month moving average of the unemployment rate and the previous year’s low point has widened from 0.37 in May to 0.43 in June.
This indicator has now reached its highest level since March 2021. However, at that time, the U.S. economy was still recovering from the collapse triggered by the COVID pandemic.
Sahm explained that even at lower levels of unemployment, an increase in the unemployment rate could trigger a reverse cycle, leading to an economic recession. She used to work as an economist for the Federal Reserve and is currently the Chief Economist at New Century Advisors.
In a Bloomberg opinion column in November 2023, she wrote, “When workers lose income, they cut spending, when businesses lose customers, they need fewer workers, and so on.” She added that once this reverse cycle begins, it tends to self-reinforce and accelerate.
During an interview with CNBC in June 2024, Sahm stated that the Federal Reserve continuing to delay rate cuts could lead to an economic downturn.
She said, “This is a real risk, I don’t understand why the Fed is advocating for this risk. I don’t know what they are waiting for.”
Sahm also mentioned that the Fed’s tendency to wait for deteriorating employment conditions is a mistake, and policymakers should focus on changes in the employment rate in the labor market.
“We are already in a recession, and not all unemployment rates are the same,” she explained. “These dynamics have their own impact. If people lose their jobs, they will stop consuming, and then more people will lose their jobs.”
Jeremy Siegel, a professor at the Wharton School of Business, expressed concern that if the Federal Reserve does not start cutting rates soon, both the stock market rally and strong economy could be at risk.
This top economist has been urging the Federal Reserve to ease monetary policy for several months.
In an interview with CNBC on July 4th, he mentioned that the unemployment data indicates that the U.S. economy is closer to triggering the highly accurate Sahm recession rule.
During this more than a year-long record-breaking period of rate hikes by the Fed, one major surprise has been the resilience of the labor market. Job additions have been steady every month, and the unemployment rate has remained below 4%.
Siegel pointed out that the Sahm rule and two other recession warnings – the inverted U.S. Treasury yield curve and slowing money supply – are appearing in tandem.
“We are in an economic slowdown,” Siegel said. “I believe Chairman Powell should indeed be prepared to cut rates in July and perhaps again in November. I think inflation has certainly been under control, and I don’t want to see an economic slowdown turn into something worse.”
Ian Shepherdson, Chief Economist at Pantheon Macroeconomics, indicated that all of these changes could occur in the coming months. However, he also expects the Fed to cut rates.
Shepherdson accurately predicted the U.S. housing market bubble of 2008. He also forecasted an economic recession in 2023, which did not occur.
In a report to clients on Monday, he stated that various sectors of the U.S. economy are likely to weaken in the coming months, including the labor market.
“This is the first round of preliminary indicators indicating a significant slowdown in economic growth driven by the consumer, with significant softening in the labor market in the second quarter.”
He also mentioned that these figures have uncertainties and require more evidence over the next few months regarding weak retail sales, subdued hiring indicators, and evidence of increased layoffs.
Currently, the market expects the Fed to cut rates three times in 2024 by 25 basis points each time. Shepherdson suggested that if his interpretation of the data is correct, this number is more likely to be five times.
“Nothing changes the thoughts of policymakers and investors more than a continued softness in employment, so if the leading indicators are correct, the tone of the Fed’s meetings this summer will be very different, and the market will be pushing for more rate cuts,” Shepherdson said.