A disappointing jobs report released Friday morning triggered a sharp selloff in the stock market and stoked fears of a coming recession — thanks to the so-called “Sam’s Rule.”
So what is that?
It’s named after economist Claudia Sahm, who served as a senior economic adviser during the Obama administration and identified a historical indicator of the 2019 recession: Every time since 1970, a U.S. job loss The three-month moving averages of the rates are both more than half a percentage point above last year’s lowest three-month moving average, and a recession could soon follow.
Admittedly, this is a bit complicated. If you want to see what’s really going on, check out today’s jobs report. The unemployment rate rose to 4.3% in July. Over the past three months, the average unemployment rate was 4.13%. This is significantly higher than the lowest three-month average of 3.63% between June and August 2023 last year.
In this way, Sam’s rule is triggered.
But “rules” are also a set of guidelines. In her 2019 paper, Sam proposed this historic early warning system for an impending recession, calling on governments to start allocating stimulus funds as soon as the warning was triggered. Doing so, she argued, would allow for a faster response to the recession by eliminating the lag that occurs when politicians and other observers debate whether a recession is coming and how to respond to it. Essentially, it is a technical solution to a recurring problem.
The political system isn’t taking that approach—thank God, since the federal government has a debt of $35 trillion and a deficit of $2 trillion this year. There’s really no money for stimulus checks right now.
However, the market appears to be taking Sam’s Rule seriously. Stocks sold off sharply on Friday morning and bond yields fell – a sign that investors are essentially pricing in the cost of the coming downturn.
But there’s a more complicating factor. Sam himself said it might have been a false alarm.
wall street journal According to the report, “Sam does not believe the economy is about to enter a recession. She believes that changes in the labor supply since the pandemic, including a recent surge in immigration, have led to Sam’s rule exaggerating how weak the job market is.”
“We’re still in good shape, but until we see signs of stabilization, of leveling off, I’m concerned,” said Sam, who once worked at the Federal Reserve and is now chief economist at investment firm New Century Advisors. Tell Magazine.
It pays to be cautious about the predictive power of historical trends. In fact, Sam warned in his 2019 paper, “Sam’s rule is an empirical rule. It is not a proposition and it is not a law of nature.”
Federal Reserve Chairman Jerome Powell echoed that sentiment this week. On Wednesday, he called the Sam rule a “statistical law,” adding that “it’s not like an economic rule, which tells you something has to happen.” At a meeting earlier this week, the Fed decided to maintain Interest rates were stable but hinted at a possible rate cut in September.
So are we headed for a recession? As always, it’s impossible to know unless we’re already part of it. The commonly used definition of a recession is that the economy has experienced negative growth for several consecutive quarters, but the economy grown up Growth in the second quarter of 2024 was 2.8%.
The official arbiter of a recession is the National Bureau of Economic Research (NBER), a private entity whose definition of a recession takes into account monthly indicators such as employment, personal income, and industrial production as well as quarterly gross domestic product (GDP) growth (on a quarterly basis). calculate).
Still, the outlook is certainly bleaker after Friday’s jobs report. If a recession were to come, the ability of the federal government and the Federal Reserve to respond would be severely limited by poor fiscal and monetary decisions that left the Treasury deeply in debt and central bank balance sheets overwhelmed.
Sam’s Rule has correctly predicted every recession in the past half century. We hope it’s mistaken.
