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The Sahm Rule: Is Another Recession Looming?

Economist Claudia Sahm’s rule, which predicts a recession if the three-month average of the national unemployment rate rises by 0.5% or more from the previous 12-month low, is nearing activation. This rule has accurately forecasted recessions 100% of the time since the early 1970s, making it a noteworthy indicator for economists and investors alike.

If the upcoming July jobs report reveals a rise in the unemployment rate to 4.2%, the Sahm Rule would be triggered. However, experts, including Sahm herself, are approaching this indicator with caution, considering the current economic circumstances.

Sahm pointed out in a recent post on Substack that the increase in unemployment may not be as alarming as it appears at first glance. She highlighted the unique dynamics of the labor market, such as pandemic-related distortions in workforce participation and a surge in immigration, which could be influencing the unemployment rate.

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Unlike previous instances where the Sahm Rule was activated, Sahm noted that the current increase in unemployment is not necessarily due to a weakening demand for labor. Instead, factors like a higher supply of immigrant workers entering the market might be contributing to the uptick in unemployment numbers.

Insights from experts like Bank of America Securities’ head of US economics, Michael Gapen, align with Sahm’s perspective. Gapen emphasized that the rising unemployment rate may be attributed to an imbalance between labor supply and demand, rather than firms actively reducing their workforce.

Federal Reserve Chair Jerome Powell also weighed in on the discussion, emphasizing the need to monitor potential shifts in the labor market. While acknowledging the statistical relevance of the Sahm Rule, Powell highlighted that it shouldn’t be viewed as a definitive predictor of an impending recession.

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In conclusion, while the Sahm Rule remains a valuable tool for assessing economic conditions, its applicability in the current scenario is nuanced. Understanding the broader context of the labor market and considering other economic indicators can provide a more comprehensive perspective on the potential implications of a rising unemployment rate. Stay informed and be prepared for any economic developments by staying connected to reliable sources like Extreme Investor Network.