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You may have heard about the “Sahm Rule” lately. It has become the trendiest advanced indicator of economic recessions, although we must admit that competition in this category is somewhat weak.
The term, coined by former Fed economist Claudia Sahm, means that a recession occurs when the three-month moving average of the U.S. unemployment rate rises half a percentage point from its 12-month low.
While people are still debating the benefits of the yield curve (both If it works and if so Why It works) Sahm’s rule’s simplicity, intuitiveness, and accuracy in predicting recessions have made it the new hot thing.
Oh, and here’s another reason it’s getting a lot of attention lately.
The U.S. unemployment rate rose to 3.9 percent last month – from a low of 3.4 percent – and the three-month average is now 0.33 percentage points above its April low. There are a lot of headlines about how “the labor market is on the verge of a major recession warning” and “recession rules are about to be triggered.”
It should be noted that Sahm himself has repeatedly emphasized that it is just an indicator that could easily “break,” just like other economic rules of thumb. Here’s what she recently told former alpha villain Colby Smith:
It is not a law of nature. Just because signaling early in a recession has worked in the past doesn’t mean it will necessarily work this time, because all possible empirical regularities have broken down in the post-pandemic recovery.
So a violation of the Sahm rule would occur if it reached half a percentage point, which corresponds to an unemployment rate of about 4 percent over three months, but we don’t see an overall decline. If you actually look at the forecasts that Federal Reserve officials have been writing for some time, they essentially assume that the Sahm Rule will come into effect, but not a recession: the unemployment rate will rise above 4 percent and then move on sideways.
You can now tell a story about what limits it, but we’ve never seen it. However, the impossible is possible and that was the theme of this year. The other empirical regularity was the two quarterly declines in GDP growth, and that happened, and we didn’t have a recession.
Analysts at Goldman Everything’s Great and Sachs are among those not worried about the recent rise in unemployment.
While they expect underlying job creation to slow over the next year from about 175,000 currently, it will remain above the monthly rate of 100,000 to keep unemployment stable through the end of 2024.
“We do not expect the recent increase to herald an upward trend in the unemployment rate for several reasons,” they argue. Here are their four main reasons.
First, broader labor market data suggests that job growth is expected to remain strong. The number of job vacancies remains well above 2019 levels in virtually all industries, and both layoff rates and initial jobless claims remain low.
Second, the increase in the unemployment rate since April is due entirely to an increase in the labor force, rather than a decline in employment, which could trigger the vicious cycle between job losses and reduced spending that often leads to a recession.
Third, weakness in household employment has been concentrated among the most volatile and poorly measured parts of the labor force, such as the self-employed and young workers. In fact, two-thirds of the overall increase in the unemployment rate since April can be attributed to higher unemployment rates among workers under 24, even though these workers make up only 15% of the labor force.
Fourth, we estimate that remaining seasonality dampened household survey employment growth by 100,000 to 150,000 in October and by 40,000 on average over the past six months.
Goldman’s Manuel Abecasis admits that technical factors such as the birth-death model (how the creation and closure of new companies are calculated) could overstate the underlying pace of job growth by around 40,000.
However, Abecasis notes that payroll employment growth has recently been much stronger than in the household survey and that household employment tends to converge to payroll employment over time. This gives him the certainty that everything is still okay.
Of course, not everyone is so confident. Peter Berezin from BCA: “The risk of Armageddon has increased dramatically. Stay Bullish on Stocks Over a 12-Month Horizon” Glory – sees “clouds on the horizon” (no nuclear mushroom clouds this time, though).
Measured by the household survey, employment has fallen by 40,000 in the last three months. While wage growth has been robust – an average of 204,000 over the past three months – this can be partly attributed to an increase in the number of multi-employed workers (which contributes to payroll but not to the household survey).
Additionally, wage growth in October was driven heavily by some industries, such as healthcare and government, which had experienced woeful staffing shortages. The extent of employment gains, measured by the share of industries with positive wage growth, fell to its lowest level since April 2020.
Worryingly, Berezin argues that this is part of a much broader trend of “slower job growth, fewer job vacancies and in some cases slightly higher unemployment” in most developed markets.
Although it is still early days, the BCA reinforces its view that the global economy will suffer a recession in 2024. So perhaps Sahm’s rule will make another successful prediction in the coming months.
Source : www.ft.com