It's interesting to watch how we've moved from the "debating the yield curve inversion" phase to the "debating the labor market slowdown" phase of this dwindling business cycle. The fact that we are even following this progression suggests to me the conditions are still in place for the long-expected downturn
The talk of the town lately has been whether we have officially triggered the "Sahm rule" or not that marks the actual onset of a recession.
The rule says that when the unemployment rate rises half a point from the cycle lows, we are in a recession. And it was actually developed by former Fed economist Claudia Sahm in part as a policy proposal, to trigger the disbursement of stimulus checks that would help stop the recession in its early tracks, as opposed to sending checks after the fact, as is more common but much costlier to society.
As of October, the unemployment rate has officially risen from a low of 3.4% in April to 3.9%. Hence all of the recent discussion. But Sahm herself cautions that it's supposed to be a three-month moving average, so we haven't technically triggered it yet. More intriguingly, she also thinks we could "break" the Sahm rule this time and not go into recession at all, which we discussed when she joined The Exchange on Friday.
But as I told her, the reason I like the Sahm rule is that it speaks to a tendency we often experience, which is that the first half-point rise in the unemployment rate rarely "feels" like a big deal, and is typically dismissed. The whole point of her rule is that we should take these moves seriously, and prepare for the worst rather than hoping for the best.
And her rule isn't the only one that's currently flashing a warning sign. Michael Kantrowitz of Piper Sandler has a "10% rule," which is that when the total number of unemployed people rises by 10%, we've always had a recession. As of October, we're at 7.7%. Michael Darda at Roth MKM has a similar rule for continuing jobless claims. Anytime they've risen 10% from year-earlier levels, we've been in or about to be in a recession. And currently, we're up a whopping 30%.
All of which is to say, that while "the inverted yield curve presents the conditions for a recession, the employment rules are the evidence of one," as Kantrowitz puts it. It's not a great sign that we're close to (or already have been) triggering these indicators. And as Darda warns, we've also seen stock market rallies of more than 20% after yield curve inversions before (in 1989-90 and 2006-07), but all of them have been more than reversed when the ensuing downturns arrive.
Another not-so-great sign? California, which is both the largest state by GDP and often a leading indicator, is already in recession, if the Sahm rule holds. Its unemployment rate peaked at 3.8% more than a year ago, and had risen to 4.7% in September, as Chris Rupkey of FWDBonds points out. The October figures are due out Friday.
So yes, it's temping to dismiss all the jeremiads about recession and be consoled that the labor market for now is "still pretty strong." But in order for it to stay strong from here, we'd have to be in the first cycle ever that breaks all of the aforementioned rules. As Sahm herself put it last week, "when the unemployment rate starts rising, it usually keeps going."
See you at 1 p.m!
Kelly
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