Rising US unemployment

Key takeaways

• A rising US unemployment rate and triggering of the Sahm rule have spooked financial markets in recent weeks. However, a deeper analysis shows that increasing labor supply, rather than growing job losses, has been the primary driver of the pickup in unemployment.
• Alternative approaches to analyzing labor data yield a similar, less-worrisome conclusion and support the notion that the job market is best characterized as normalizing from extreme tightness in the post-pandemic period.
• With a minimal increase in workers losing their jobs, the outlook for future consumption should remain supportive and contribute to a continuation of the current expansion.

Over the past several years several traditional recessionary signals have become less reliable, posing a challenge for macroeconomists and financial markets. We have long believed that taking any recessionary signal at face value can be fraught with peril, and instead seek to understand the “why” behind any indicator. Such analysis leads us to conclude that the recent triggering of the Sahm rule¹ may be less concerning than suggested by the response in financial markets.

The Sahm rule states that “when the three-month moving average of national unemployment is 0.5 percentage point or more above its low over the prior 12 months, we are in the early months of a recession.”² It is important to note that this observation is just that, an observation, not a causal rule. In fact, Federal Reserve (Fed) Chair Jerome Powell described the Sahm rule as a “statistical regularity”³ when asked about it at last month’s Federal Open Market Committee (FOMC) press conference.

This isn’t to say the Sahm rule isn’t useful. Underpinning this statistical regularity are dynamics that can help inform the discussion of recessionary risk. One of those dynamics is inertia, or the notion that an object in motion tends to stay in motion. Historically, a 0.5 percentage point increase in the unemployment rate has presaged a much larger non-linear increase. Put differently, a steady drip of layoffs eventually leads to the dam breaking, and once it does, the water (job losses) comes gushing through. There is nothing magical about the 0.5 percentage point threshold. Rather, we believe the cutoff is best viewed as a level that has historically lined up well with the early innings of past recessions.

In this paper, we take a closer look on rising unemployment within the United States but a with different conclusion.