Although the unemployment rate remains at historically low levels, its growth rate could be a sign of deteriorating economic conditions. This is where the so-called Sam Rules come into play.
It said a recession begins when the three-month moving average of the unemployment rate rises by at least 0.5 percentage point from the low of the past 12 months. This rule has predicted every recession since 1970.
The gap between the two widened to 0.43 in June from 0.37 in May, according to the latest unemployment rate data released by the Labor Department on Friday.
It has now reached its highest level since March 2021, when the economy was still recovering from the collapse caused by the epidemic.
The rule’s creator, Claudia Sahm, is a former Fed economist and now chief economist at New Century Advisors. She has previously explained that rising unemployment, even at low levels, could trigger a negative feedback loop that could lead to a recession.
“When workers lose paychecks, they cut spending, when businesses lose customers, they need fewer workers, and so on,” she wrote in a Bloomberg Opinion column in November. She added that once such A feedback loop begins, usually self-reinforcing and accelerating.
But she also said the epidemic may have caused so much disruption to the economy and labor market that indicators such as the unemployment-based Sam rule may not be as accurate right now.
However, a few weeks ago, Sam told CNBC that the Fed’s continued delay in cutting interest rates could push the economy into recession.
“My benchmark is not a recession,” she said on June 18, “but it’s a real risk and I don’t understand why the Fed is pushing that risk. I don’t know what they’re waiting for.
A few days ago, the Federal Reserve held its June policy meeting, where central bankers kept interest rates steady at 5.25%-5.5% since July 2023 (the highest level since 2001).
The Federal Reserve will meet again at the end of this month and is expected to remain on hold, but the possibility of a rate cut in September is rising.
Sam also said last month that Fed Chairman Powell was wrong to prefer to wait for employment growth to worsen and that policymakers should focus on the rate of change in the labor market.
“We’re already in a recession, with unemployment rates varying,” she explained. “These dynamics will work themselves out. If people lose their jobs, they will stop consuming, [and] More people are unemployed.
Meanwhile, Wall Street is taking a more optimistic view of the economy, citing last year’s widespread recession predictions that proved wrong and a boom in artificial intelligence that is helping to drive a wave of investment and profit growth.
Last month, Neuberger Berman senior portfolio manager Steve Eisman also noted the growth in infrastructure spending.
“We’ve just turned the corner, and I think the only conclusion you can draw is that the U.S. economy is more dynamic than it’s ever been in history,” he told CNBC.
