\n
![](\"https:\/\/fortune.com\/img-assets\/wp-content\/uploads\/2024\/07\/GettyImages-1154940500-e1720286946148.jpg?w=2048\")
<\/p>\n [ad_1]
\n<\/p>\n
While unemployment is still historically low, its rate of increase could be a sign of deteriorating economic conditions. That\u2019s where the so-called Sahm Rule<\/a> comes in.<\/p>\n It says that when the three-month moving average of the jobless rate rises by at least a half-percentage point from its low during the previous 12 months, then a recession has started. This rule would have signaled every recession since 1970.<\/p>\n Based on the latest unemployment figures from the Labor Department\u2019s monthly report on Friday, the gap between the two has expanded to 0.43<\/a> in June from 0.37 in May.<\/p>\n It\u2019s now at the highest level since March 2021, when the economy was still recovering from the pandemic-induced crash. <\/p>\n The creator of the rule, Claudia Sahm, was an economist at the Federal Reserve and is now chief economist at New Century Advisors. She has previously explained that even from low levels a rising unemployment rate can set off a negative feedback loop that leads to a recession. <\/p>\n \u201cWhen workers lose paychecks, they cut back on spending, and as businesses lose customers, they need fewer workers, and so on,\u201d she wrote in a Bloomberg opinion column<\/a> in November, adding that once this feedback loop starts, it is usually self-reinforcing and accelerates.<\/p>\n But she also said the pandemic may have caused so many disruptions in the economy and the labor market that indicators like the Sahm Rule that are based on unemployment may not be as accurate right now.<\/p>\n A few weeks ago, however, Sahm told CNBC<\/a> that the Federal Reserve risks sending the economy into a recession by continuing to hold off on rate cuts.<\/p>\n \u201cMy baseline is not recession,\u201d she said on June 18. \u201cBut it\u2019s a real risk, and I do not understand why the Fed is pushing that risk. I\u2019m not sure what they\u2019re waiting for.\u201d<\/p>\n That came days after the Fed\u2019s June policy meeting when central bankers kept rates steady after holding them at 5.25%-5.5%\u2014the highest since 2001\u2014since July 2023. <\/p>\n The Fed meets again at the end of this month and is expected to remain on hold, but odds are rising that a cut could happen in September.<\/p>\n Sahm also said last month that the Fed Chair Jerome Powell\u2019s stated preference to wait for a deterioration in job gains is a mistake and that policymakers should instead focus on the rate of change in the labor market.<\/p>\n \u201cWe\u2019ve gone into recession with all different levels of unemployment,\u201d she explained. \u201cThese dynamics feed on themselves. If people lose their jobs, they stop spending, [and] more people lose jobs.\u201d<\/p>\n Meanwhile, Wall Street has had a more sanguine view of the economy, citing last year\u2019s widespread recession predictions that proved wrong as well as the AI boom that\u2019s helping to fuel a wave of investment and earnings growth.<\/p>\n Last month, Neuberger Berman senior portfolio manager Steve Eisman also pointed to the boost in infrastructure spending.<\/p>\n \u201cWe\u2019re just powering through, and I think the only conclusion you can reach is that the U.S. economy is more dynamic than it\u2019s ever been in its history,\u201d\u00a0he told CNBC<\/a>.<\/p>\n<\/div>\nSubscribe to the CEO Daily newsletter to get global CEO perspectives on the biggest stories in business. Sign up for free<\/a>.<\/div>\n