Investment Strategy
1 minute read
A softer than expected July jobs report has sent jitters through the market this week. As a result, the “Sahm Rule” has dominated financial headlines. A quick Google search will likely lead you to dozens of articles placing it at the center of elevated recession chatter. Let’s break it down.
1. Sahm Rule 101:
The Sahm Rule is an economic rule of thumb created in early 2019 by economist Claudia Sahm. It is meant to serve as a helpful guide for policymakers and intended to act as an “early diagnosis” of possible recession. A recession is defined by the National Bureau of Economic Research (NBER) as a significant decline in broad economic activity lasting more than a few months. The NBER is responsible for determining when the United States has entered a recession, and that often takes a while.
Bottom line: The Sahm Rule is helpful and has a good track record. Modern economic data is less than 80 years old, and we have seen 12 U.S. recessions. That said, just because something hasn’t happened in that data set doesn’t mean it’s out of the question. Claudia Sahm herself indicated in a timely op-ed that it’s not all black and white.
2. Could the current environment be the exception to the rule?
We think so. We acknowledge that risks are elevated, and we believe concerns are warranted, but today’s labor market dynamics could be a differentiator.
Bottom line: The Sahm Rule may be overstating recent economic weakness, especially in the labor market. There’s no denying the decrease in jobs being added reinforces a slowing economy, but we think the labor market data is pointing toward an economy that is closer to full employment (with pickups in labor force participation, minimal layoffs and stable aggregate demand), rather than a recession characterized by a pickup in layoffs and a collapse in aggregate demand. The rise in the unemployment rate is due to increased labor supply, not weakening demand for workers—a stark difference from past recessions.
3. Zooming out: What does this mean for the Federal Reserve?
Remember, the Fed has a mandate to ensure labor market health. Chair Powell and team do not want to “mess around and find out” about an impending recession.
Our view:
We do not think a recession is imminent. Recent volatility will likely lead the Fed to deliver cuts faster than initially anticipated, but that does not mean the economy has fallen off the rails. That said, the narrative has not changed much. We remain constructive on U.S. equities despite increased volatility, and see opportunity to lock in rates before they fall.
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