The Sahm Rule is trying to say something more than whether the economy is entering a recession, it is about understanding the process of a recession. So while the cadence of cooling has accelerated, there is still plenty of room to run before we eventually reach the point of a downturn.
Markets received a major jolt from Friday’s jobs report. While containing many signs affirmative of a cooling labor market, the most worrisome data point was the unemployment rate, which ticked up from 4.1% in June to 4.3% in July. This is still a healthy level—in the latest expansion following the Great Recession, the unemployment rate averaged 6.3%, or 4% during its final three years. Similarly, between the Dot.com bubble of 2001 and the Great Recession, average unemployment trended at 5.2%. What has spooked markets is the cadence of unemployment, and a potential realization of a perfect recession indicator known as the Sahm Rule.
The Sahm Rule indicates the beginning of a recession when the three-month moving average of the unemployment rate rises at least half a percentage point higher than its previous 12-month low. But recessions are highly variable, requiring alignment from many signals including consumption, business investment, labor market activity, financial markets and federal banking system, monetary policy, etc. In assessing these conditions—we know that consumption and business investment, while cooling, remain strong, and labor market activity is still by-and-large healthy. The recent downturn in financial markets is largely a product of increased pessimism rather than a response to systemic economic weakness, while the Federal Reserve has three meetings left and could, given recent developments, abide by or exceed its initial forecast of a 75-basis point reduction in interest rates by the end of 2024.
Even the rule’s creator, Claudia Sahm, acknowledges that we are not presently in a recession, but momentum is accumulating toward that outcome. This suggests that the Sahm Rule is trying to say something more than whether the economy is entering a recession, it is about understanding the process of a recession. So while the cadence of cooling has accelerated, there is still plenty of room to run before we eventually reach the point of a downturn.
With interest rate cuts on the table for September, an end to the labor demand doldrums may be in sight—however, the market is likely to remain cool for now.
Newly published data from the ManpowerGroup Employment Outlook Survey for Q3 2024 provides valuable insight into employer hiring plans. Specifically, the Net Employment Outlook, or the share of employers anticipating an increase in hiring activity (48%) minus the percentage of employers anticipating a decrease (18%), comes in at 30% for 3Q 2024. This marks a decline of 4% from 2Q 2024 and 5% from 3Q 2023, which portends further moderation in hiring from the peak achieved in late 2021 and early 2022.
By region, NEO was highest in the midwest (34%), followed by the northeast (33%), south (29%), and west (24%.) Only the midwest saw growth quarter-to-quarter (+4%) or year-to-year (+2%), while the west fell sharply (-16% quarter-to-quarter; -19% year-to-year), suggesting some weakness in the latter market in Q3. By industry, businesses in information technology had the highest NEO (50%), followed by industrials and materials (33%), health care and life sciences (32%), and consumer goods and services (29%). Employers in energy and utilities were the only ones to report a negative NEO (-8%).
As many staffing companies can attest, employers have indeed been cautious about hiring over the last 18-24 months. Though payroll employment has tended to rise each month, unemployment has risen recently as well, and the hires rate, quits rate, and job openings rate have all eased from the peaks seen in 2022. With interest rate cuts on the table for September, an end to the labor demand doldrums may be in sight—however, the market is likely to remain cool for now.
