Chart of the Week

RISING UNEMPLOYMENT ARGUES FOR CAUTION

The chart below shows the US unemployment rate (the number of people out of work as a percentage of the total labour force) going back to the 1950s. The shaded areas represent every US recession since then, which shows that spikes in unemployment and economic downturns go hand in hand.

At 4.3%, US unemployment is well below the levels of past recessions, but it has increased meaningfully from the 3.5% low reached in early 2023.

This is reason for caution.

The “Sahm rule” was created by an ex-Federal Reserve economist (Claudia Sahm) and is triggered whenever the three-month moving average of the national unemployment rate rises by 0.5% or more from its lowest point in the past 12 months. The indicator has successfully identified every US recession over the past 50 years.

It was triggered again last month after a weak July jobs report, which saw the US economy add only 114,000 jobs over the month. This was coupled to a whopping downward revision of prior payrolls data with the Bureau of Labour Statistics disclosing the number of US jobs created in the 12 months to March 2023 was 818,000 fewer than initially reported.

At face value, it appears the US economy is much weaker than the headline figures suggest, but there are good reasons to question the reliability of the Sahm rule this time around.

The first is that most traditional economic models are still struggling to adjust for the highly unusual conditions brought about by the pandemic. This is particularly true of labour market indicators given the vast increase in remote and flexible working arrangements.

The second is that the US has seen a significant increase in immigration in recent years so the number of people actively seeking work is likely to be far greater than the official statistic suggest. This would place upward pressure on the unemployment rate, but may not necessarily be bad news for the demand side of the economy.