Sahm rule isn’t calling for a recession AND it’s not accurate given labor market changes

As it stands, the Sahm rule is not pointing to a recession. The U.S. added nearly 200,000 jobs in November, which helped to stop an upward climb in the unemployment rate, which fell to 3.7 per cent from 3.9 per cent.

Still, the recent increase in the jobless rate – 0.3 percentage points, based on the Sahm rule’s formula – is within spitting distance of signalling a recession.

Even so, Dr. Sahm cautions that her eponymous rule is “not a law of nature. It’s just an empirical pattern that works in the United States.” Put another way, this economic cycle could prove the exception to the rule.

In recent months, people have joined the labour force at faster rates than companies can hire them, Dr. Sahm noted. The unemployment rate is climbing because of stronger labour participation (a good thing) rather than widespread layoffs (a bad thing). Furthermore, the Federal Reserve is projecting the U.S. unemployment rate will peak at 4.1 per cent, which is still remarkably low by historical standards.

The downside: The U.S. economy is clearly weakening. The Federal Reserve Bank of Atlanta projects annualized growth of gross domestic product of 1.2 per cent in the fourth quarter, a sharp deceleration from 5.2 per cent in the third quarter.

But nearly two years after the start of interest-rate hikes, the U.S. has managed to thwart an onslaught of recession predictions and draw closer to a soft landing. It’s a scenario that very few people envisioned.

“The dynamics in the economy have been so unusual,” Dr. Sahm said. “Any attempt at forecasting, or even telling a story based on the data, has to be taken with a mountain of salt.”