The Sahm Rule provides a clear signal that a recession has begun: when the three-month moving average unemployment rate rises by more than 0.5 percentage points above its low from the previous year. This metric is useful for cutting through noise and identifying when a slowly weakening job market has definitively tipped into a downturn.
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The sharp drop in the fiscal impulse represents a direct, dollar-for-dollar hit to nominal GDP that has already occurred. This indicates a recession is underway, not forthcoming. The National Bureau of Economic Analysis (NBER) will likely backdate the start of this recession to the third quarter of 2025.
Policymakers are concerned that waiting for clear data on labor market weakness could be too late. They recognize that once layoffs start to "snowball" and feed on each other, the deterioration can accelerate rapidly and non-linearly, making it crucial to be forward-looking rather than reactive to lagging indicators.
Companies have already pulled all available levers to manage costs short of layoffs, including halting hiring, cutting hours, and reducing temporary staff. Therefore, the persistently low layoff rate is the last defense holding the economy back from a recession. Any significant increase in layoffs would signal this firewall has broken.
The official unemployment rate is misleadingly low because when disgruntled workers give up looking for a job, they exit the labor force and are no longer counted as 'unemployed.' This artificially improves the headline number while masking underlying economic weakness and anger among young job seekers.
A powerful market signal is the "quad count," or the forecasted sequence of economic regimes. A progression from Quad 4 (recession fears) to Quad 3 and then to Quads 2 and 1 creates a powerful contrarian setup. This allows investors to buy assets like small caps when recession probabilities are priced at their highest.
State-level unemployment insurance data, available during the government shutdown, shows a distinct trend. Initial claims are low (companies aren't laying people off), but continuing claims are elevated (it's hard for the unemployed to find new jobs), confirming a stagnant labor market.
A major disconnect exists between Wall Street and Main Street. While jobs data points towards a potential recession, the S&P 500 is hitting record highs. Since recessions are historically preceded by market downturns, investors are signaling a strong disbelief in the negative labor market signals.
Mastercard's Chief Economist argues the labor market is in balance, not collapsing. A slowdown from 175k to ~70k jobs/month is a necessary correction from an unsustainable, post-pandemic surge. With both labor demand (hiring) and supply decreasing, key metrics like the unemployment rate remain stable, indicating equilibrium rather than decline.
Fed Chair Powell highlighted that annual benchmark revisions to labor data could reveal that the U.S. economy is already shedding jobs, contrary to initial reports. This statistical nuance, creating a "curious balance" with a stable unemployment rate, makes the Fed more inclined to cut rates to manage this underlying uncertainty.
Large, negative revisions to economic data often occur around major economic turning points. This is because companies hit first by a downturn are more likely to delay reporting their data, which makes the initial economic reports appear stronger than reality.
