The July jobs report has been dominating headlines as data came in weaker than expectations, with 114,000 jobs added to the US economy and unemployment rising to 4.3%. The July jobs data triggered the highly-watched recession indicator known as the Sahm Rule, but what exactly is it?
Market Domination anchor Julie Hyman explains what the Sahm Rule is, developed by and named after former Federal Reserve economist Claudia Sahm.
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This post was written by Mariela Rosales.
After jobs numbers came in weaker than expected in July, a metric called the Sahm rule was triggered. Yahoo Finance's Julie Hyman joins me now with a closer look.
And we've been talking about this Sahm rule not just all day, but really for months, uh, leading up into this jobs report where it was actually triggered. So we wanted to give a little refresher. What exactly is the Sahm rule? It was developed by economist Claudia Sahm, and basically it shows, it takes a look at the average of the unemployment rate over the past three months.
And it's the difference between that and the lowest that that three-month average went over the previous year. If that rises a half a point or more, half percentage point or more, that could mean that we are in a recession. Now, Jay Powell earlier this week called it a statistical regularity. Some refer to it as an indicator. Doesn't mean for sure that we are entering a recession. Well, for that we got the take of Claudia Sahm herself this morning on Yahoo Finance.
The Sahm rule and many other indicators we've had of say recessions, like two quarters of GDP declines, we had that in 2022. We had no recession, right? Like we really have to think about the particular context for now. So do I think we are in a recession right now? No. Do I think that the increases in the unemployment rate and the softening in the labor market is worrisome and could we could end up in a recession in say three months, six months? Yes, I am very concerned about that.
And she's not the only one, obviously, judging from the market reaction today. So here's a look at the Sahm indicator here. The recession threshold, this dotted line, and we've just gone above it. Obviously, we went above it when we had the recession in during the pandemic time, financial crisis, etc., if you go all the way back to 1960. And then zoomed in on that, it shows us going above that level with that 4.3% unemployment rate that was reported today. So again, that recession indicator triggered. As to whether we're in a recession, we're going in a recession, Josh, obviously, the debate is just beginning over that.
Yeah, and then and then also interesting to see the pressure on the Fed ramp as well, Julie, because of all this. I mean how many economists and strategists were out today, uh, talking to their clients about how they were now banging the table, and some of them to be fair have been doing this for a while that the Fed has just been behind the curve. And so putting on pressure of what what their next step is, the pace of cuts, you know, when they cut?
Right. Yeah. Well, Mike Darda over at Roth MKM, he has been saying for a while that the economic indicators were pointing in the wrong direction. He thinks that we are currently in a recession. But then we talked to Jason Draho over at UBS today, he thinks that the Fed should cut a half point, but he doesn't seem that concerned that we are in recession and thinks we could still see a soft landing. So it's interesting, uh, there's a lot of dispersion both in where we are on the recession spectrum, but also, uh, in terms of what the Fed's going to do, but the Fed stuff seems to be coalescing more than the recession perception does. I'm realizing that as I even as I say it, Josh.
That's interesting.
Yeah, bottom line, probably even more focused than usual now on Jackson Hole, I think.
Yeah. Most definitely.
