\n
![](\"https:\/\/fortune.com\/img-assets\/wp-content\/uploads\/2023\/06\/GettyImages-1258692279-e1686821640617.jpg?w=2048\")
<\/p>\n [ad_1]
\n<\/p>\n
Former Federal Reserve economist Claudia Sahm cautioned against investors prematurely forecasting an imminent U.S. recession by citing the very jobs market indicator named after her.\u00a0<\/p>\n
In a post on Substack, the founder of Sahm Consulting acknowledged that the risk of recession has certainly risen as demand for labor softens. But she argues this is largely only because of lagging effects from an\u00a0overheated economy<\/a>, in which an\u00a0exodus of workers<\/a>\u00a0known as the Great Resignation\u00a0starved businesses of talent<\/a>.<\/p>\n While rising numbers of Americans actively\u00a0<\/em>seeking a job but unable to find one is a necessary prerequisite for a shrinking U.S. economy, Sahm pointed to other indicators that are inconsistent with a broad-based weakening in activity. These include consumer spending as well as, crucially, another labor market data point: non-farm payrolls.\u00a0<\/p>\n \u201cA recession is not imminent, even though the Sahm rule is close to triggering,\u201d she\u00a0wrote<\/a>\u00a0on Friday.\u00a0<\/p>\n Named after the economist herself, this rule signals the likely start of a recession once the unemployment rate\u2019s current three-month moving average (which smooths out noisy volatility) exceeds the lowest three-month moving average of the trailing 12 months by half a percentage point or more. That reading is currently 0.43% pts.,\u00a0according to Fed data<\/a>.<\/p>\n Even if the Sahm rule is already flashing yellow, she believes there are extenuating circumstances\u2014namely the upward pressure on the U.S. labor market exerted by rising numbers of immigrants that is artificially inflating the official unemployment rate. This effect distorts the data enough to risk drawing the wrong conclusions, in her view. Moreover, official revisions to past data can always end up blunting the initial reading after the fact.<\/p>\n \u201cThe Sahm rule is likely overstating the labor market\u2019s weakening due to unusual shifts in labor supply caused by the pandemic and immigration,\u201d she wrote.<\/p>\n Typically when the U.S. Bureau of Labor Statistics publishes jobs numbers on the first Friday of every month, markets tend to zero-in on the hard data of jobs created or cut by employers\u2014the non-farm payrolls\u2014as opposed to the household survey that forms the basis of the official unemployment rate.<\/p>\n The state of the U.S. economy is front and center this week as the Fed\u2019s policymaking body, the FOMC, is scheduled to meet for two days with a press briefing scheduled for Wednesday.\u00a0<\/p>\n Few economists are expecting\u2014much less\u00a0calling for<\/a>\u2014a cut in the benchmark rate banks charge to lend and borrow overnight amongst each other.\u00a0<\/p>\n Most however anticipate it will begin preparing markets for one in September, marking the starting shot of its first easing cycle going back\u00a0five years to the day<\/a>.<\/p>\n In June, policymakers\u00a0surprised CEOs and investors<\/a>\u00a0by revising the number of rate cuts this year from three predicted in March to just one. The Fed\u2019s latest quarterly projections also now foresee slightly higher levels of inflation than they did previously, as pricing pressure proves stickier.<\/p>\n The Fed has been taking a cautious stance, refusing to declare victory over inflation in the fear premature easing could reignite pricing pressure and risk its credibility. Fed chair Jay Powell famously told investors in 2021 that inflation was merely\u00a0transitory<\/a>, a prediction that proved dead wrong.\u00a0<\/p>\n Sahm argued\u00a0last week<\/a>\u00a0the Fed should have already begun lowering rates as inflation has tempered sufficiently to allow for an easing of policy from its current restrictive levels.\u00a0<\/p>\n While the Sahm rule is signaling caution ahead, it alone is not enough evidence upon which to predict the economy is about to shift into reverse. The distortions \u201cmagnifying the increase in the unemployment rate\u201d caused by immigration and the lasting aftershocks from the pandemic inject too much noise in the data.<\/p>\n \u201cA recession is not imminent, but the risks of a recession have risen,\u201d she concluded.<\/p>\n<\/div>\nMarkets on lookout for a September rate cut<\/h2>\n
Inflation stickier than anticipated<\/h2>\n
Recommended Newsletter: <\/strong>CEO Daily provides key context for the news leaders need to know from across the world of business. Every weekday morning, more than 125,000 readers trust CEO Daily for insights about\u2013and from inside\u2013the C-suite. Subscribe Now<\/a>.<\/div>\n