Cool, Sahm and Collected
Authors & Contributors
The Google search for “recession” has spiked to its highest level since the 2022 recession panic.
Impending Recession or Another False Alarm?
Recent data show that the US jobs market has cooled in recent months, raising uncertainty over the near-term resilience of the economy. In the data for July, the unemployment rate rose for the fourth straight month to 4.3%, causing a sudden wave of anxiety that the economy is entering a recession. This was reflected in a significant spike in Google searches for “recession”, which peaked in 2022 when widespread recession fears proved to be a false alarm.
We do not think that recent cooling in the labor market forebodes a recession hiding around the corner. Data on the broader economy suggests continued strength in domestic spending and minimal concern around industrial activity—nothing that hints at the US economy heading for a cliff.
A notable aspect of the July employment report was that the rising unemployment rate triggered the Sahm Rule. The Sahm Rule identifies signals related to the start of a recession and is triggered when the three-month moving average of the unemployment rate rises 0.5% or moves more relative to its lowest point during the previous 12 months.
However, there’s a few reasons to remain calm and take this measure with a grain of salt. First, a large factor behind the rising unemployment rate is a growing labor force. The labor force is powered by strong immigration and an increasing participation rate for prime-age workers (25 to 54 years old) which reached 84% in July, its highest level since 2000. On the demand side, the labor market is still creating jobs on net, despite a slower pace. Second, the rise in the unemployment rate has been shallower than in any recession since 1960.
While we don’t see signs of imminent recession, we do see significant evidence that the labor market has cooled off. Job openings have fallen, workers are more reluctant to quit, and the average spell of unemployment is longer. The Federal Reserve (Fed) shares this view, with Chair Powell telling us in his Jackson Hole speech that “the labor market has cooled considerably from its formerly overheated state” and that they “do not seek or welcome further cooling in labor market conditions.” This adds to the Fed’s confidence that it can dial back some of its monetary policy restriction. A cooling job market and positive news on inflation has opened the door for the Fed to begin cutting rates at its September Federal Open Market Committee meeting. We anticipate a 25-basis-point cut followed by like-sized moves once a quarter through 2026.
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