Current:Home > InvestThe 'R' word: Why this time might be an exception to a key recession rule -Wealth Pursuit Network
The 'R' word: Why this time might be an exception to a key recession rule
View
Date:2025-04-16 16:02:20
October's unemployment rate set off alarm bells in some quarters. That's because it was a half percentage point higher than its recent low — a jump that by one rule of thumb signals the onset of a recession.
The monthly jobs report showed the U.S. unemployment rate was 3.9% in October — very low by historical standards but up from 3.4% in April.
Here's why that's worth watching, but may be less worrisome than it seems.
The Sahm Rule has observed a pattern since 1970
The rule was formulated by Claudia Sahm, a former Federal Reserve economist, who observed that every time since 1970 that unemployment rose by half a percentage point or more from its low point in the preceding year, it marked the beginning of a recession.
The logic of the rule is simple: When people lose their jobs, they spend less money, which puts pressure on businesses to cut more workers, and the downward cycle continues. Once unemployment jumps by half a percentage point, it typically keeps on climbing — at least 2 points and sometimes more.
But Sahm says this time may be different.
"Empirical patterns are not laws of nature," Sahm told Weekend Edition Sunday. "Rules are made to be broken."
Why this time might be different
First, there's the math. The Sahm Rule is based not on the monthly unemployment rate, but rather a three-month rolling average. And while that's up from its rock-bottom level in April, it hasn't risen by half a percentage point — at least not yet. So the alarm bell isn't actually ringing.
What's more, much of the recent rise in the unemployment rate stems not from people losing their jobs but from new people entering or re-entering the workforce. More people were working in October than were in April. But because the number of people available to work had grown faster, the unemployment rate went up.
That's not likely to trigger the kind of negative feedback loop of layoffs and reduced spending the Sahm Rule is based on. In fact, personal spending has remained surprisingly strong — helping to boost GDP at a rapid rate in July, August and September.
But we're not out of the woods
It's not clear how long that pace of spending can continue, however. The Federal Reserve has raised interest rates aggressively in an effort to curb inflation. That's already put the brakes on the housing market, and could slow other parts of the economy as well.
Many people have been relying on borrowed money to support their spending. Credit card debt grew to a record $1.08 trillion in the fall. And the number of people falling behind on credit card bills has been growing.
"I'm a macroeconomist, so I'm pessimistic by my wiring," Sahm says. "We want to hope for the best but prepare for the worst. And the way that I can help people prepare is having a good read on what's going on in the economy."
Many forecasters still think a recession could be on the horizon. But for now at least, there's no rule saying it has to be that way.
veryGood! (8)
Related
- How to watch new prequel series 'Dexter: Original Sin': Premiere date, cast, streaming
- New York City Ready to Expand Greenways Along Rivers, Railways and Parks
- A West Virginia bill to remove marital exemption for sexual abuse wins final passage
- The Absolutely Fire Story of How TikToker Campbell Puckett Became Husband Jett Puckett's Pookie
- Behind on your annual reading goal? Books under 200 pages to read before 2024 ends
- 4 Missouri prison workers fired after investigation into the death of an inmate
- Killing of Laken Riley is now front and center of US immigration debate and 2024 presidential race
- Which movie should win the best picture Oscar? Our movie experts battle it out
- McKinsey to pay $650 million after advising opioid maker on how to 'turbocharge' sales
- Handmaid's Tale Star Madeline Brewer Joins Penn Badgley in You Season 5
Ranking
- Costco membership growth 'robust,' even amid fee increase: What to know about earnings release
- RNC votes to install Donald Trump’s handpicked chair as former president tightens control of party
- Baltimore Ravens DT Justin Madubuike agrees to four-year, $98M contract extension
- Trump posts $91 million bond to appeal E. Jean Carroll defamation verdict
- Former longtime South Carolina congressman John Spratt dies at 82
- Program that brought Ukrainians to North Dakota oil fields ends
- Russell Wilson visits with Steelers, meets with Giants ahead of NFL free agency, per reports
- Sheldon Johnson, Joe Rogan podcast guest, arrested after body parts found in freezer
Recommendation
Meta donates $1 million to Trump’s inauguration fund
Lead-tainted cinnamon has been recalled. Here’s what you should know
Peek inside the gift bags for Oscar nominees in 2024, valued at $178,000
Meghan Markle Slams “Cruel” Bullying During Pregnancies With Her and Prince Harry’s Kids Archie and Lili
Bill Belichick's salary at North Carolina: School releases football coach's contract details
Drake announced for Houston Bun B concert: See who else is performing at sold-out event
Pierce Brosnan says 'Oppenheimer' star Cillian Murphy would be 'magnificent' James Bond
Trump posts $91 million bond to appeal E. Jean Carroll defamation verdict