Higher unemployment numbers might raise a cautionary flag, but things really might be different this time.
The office of the California Employment Development Department in Sacramento. Rising unemployment numbers nationwide might trigger the Sahm Rule, a recession indicator.Do you remember the 2023 recession? I hope not, because it didn’t happen. But back in 2022 there were so many confident predictions of imminent recession that I wonder whether some people have the vague sense that they must have come true.
However, in 2022 an inverted yield curve didn’t presage recession. I could talk about why this time was different, but it would take me too far from my current topic. You see, there’s a good chance that this Friday’s employment report will trigger another recession indicator, the Sahm Rule, named after Claudia Sahm, a former Federal Reserve economist who is now an independent consultant.As Sahm has explained, her rule wasn’t designed to predict recessions.
Why the unemployment rate? Because unlike, say, GDP, it’s reported monthly. Why a three-month average? Because monthly data is noisy, and you want to smooth it out a bit. Why 0.5 percentage points? Because that’s the number that seems to work best on historical data. In fact, it has worked incredibly well.
The thing is, new entrants to the workforce, who are still finding their way in the job market, typically have higher unemployment than more established workers. So some of the recent rise in unemployment probably reflects friction rather than a weakening economy.
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