(NewsNation) — Stocks took a nosedive Friday after a weak jobs report triggered a reliable recession indicator known as the Sahm Rule, raising fears the economy is headed for a downturn.
Friday’s report from the Labor Department showed hiring fell sharply in July, with employers adding just 114,000 jobs — 35% fewer than expected. The unemployment rate ticked up for the fourth consecutive month and now stands at 4.3%, the highest since October 2021.
The latest unemployment reading set off the so-called Sahm Rule, which says that a recession is almost always underway when the three-month average unemployment rate rises half a percentage point from its low point over the past year.
“Things are deteriorating quickly,” Julia Pollak, chief economist at the job marketplace ZipRecruiter, told the Associated Press.
The gloomy economic data comes just days after the Federal Reserve left its key interest rate unchanged at a 23-year high of 5.3%. That means any relief in the form of a rate cut will not come until September at the earliest. Now, investors are questioning whether rates have been kept too high for too long.
“The Fed is seizing defeat from the jaws of victory,” Brian Jacobsen, chief economist at Annex Wealth Management, told the AP. “Economic momentum has slowed so much that a rate cut in September will be too little and too late.”
If the Fed cuts rates, as many expect it to in September, it would make it easier for households and companies to borrow money, which would benefit consumers. The question is how long it will take for that positive jolt to ripple across the company.
“Low interest rates coming in September will give an artificial sugar high to the economy,” Tom Gimbel, founder of LaSalle Network, told NewsNation on Friday.
When that happens, Gimbel said he expects the stock market to go up and more investment money to come off the sideline. However, he thinks the high will wear off into 2025.
“In 2025 you’re going to see a much more bear market both in the jobs sector as well as in the stock market,” he said.
What is the Sahm Rule?
The Sahm Rule — named after former Fed economist Claudia Sahm — says that when the three-month moving average of the unemployment rate rises half a percentage point or more above its low point over the past year, the economy is usually in a recession.
Over the past three months, the average unemployment rate is 0.53 percentage points above the three-month average low of 3.6% over the past year.
The Sahm Rule has been triggered early in every recession since 1970, and there have only been two false positives since 1959. However, there’s reason to think this time could be different, according to Sahm herself.
“The swing from labor shortages caused by the pandemic to a burst in immigration is magnifying the increase in the unemployment rate,” Sahm wrote in a July 26 Substack article.
In other words, the rule is likely overstating the labor market’s weakness because of those unusual shifts.
Sahm concluded that a recession “is not imminent, but the risks of a recession have risen.”
Economist Paul Krugman also cautioned against tying the Sahm Rule to an inevitable recession: “Don’t panic; it probably doesn’t mean that we’re in a recession. But the Fed should definitely be cutting rates.”
The Associated Press contributed to this report.