Recession likely – unemployment rates high.

The unemployment rate has steadily ticked up in recent months to the point where the Sahm Rule is on the verge of being triggered. A 4.2% unemployment rate in July would mean that the three-month moving average has risen half a percentage point since last August.

In the past, such rises in unemployment have meant that the economy is already in the midst of a downturn. (Recessions are only officially declared by the National Bureau of Economic Research, the nation’s official recession referees, months or even years after they began, based on backward-looking data.)

Other Signals (So Far Falsely) Predicted Recession

For years, some economists have forecast an imminent recession because of the Federal Reserve’s campaign of interest rate hikes, which are intended to slow the economy in order to contain inflation. Historically, high interest rates make borrowing and spending so costly for businesses and individuals that the economy nosedives sooner or later.

This time around, economists have found reasons to doubt the rule will hold true. The country is in an unusual economic situation, and other previously reliable recession indicators have set off false alarms.

An indicator called the inverted yield curve has warned of a recession since mid-2022, but that has yet to materialize.

An index of leading economic indicators compiled by the Conference Board, also signaled in early 2022 that the U.S. was on the brink of a recession but has since switched off.

Labor Market Isn’t As Dire As It Seems—Yet

Further complicating the picture, the unemployment rate hasn’t risen just because people are getting laid off, but because more people are entering the workforce and are looking for work they haven’t found yet—hardly reason for alarm. And unemployment is still near its pre-pandemic average after hitting a 50-year low last year amid high demand for workers.

“If the recent rise in the unemployment rate proves to be more a matter of normalization from its exceptionally low level generated by the unique circumstances of the post-pandemic economy, rather than the early signs of a downturn, it would not be the first recession signal to misfire this cycle,” Sarah House and Aubrey George, economists at Wells Fargo Securities, wrote in a commentary.

Still, the rule being invoked could prove to be a significant turning point in an economy that has, up to this point, defied many predictions of a slowdown.

“With momentum in the jobs market difficult to shift, we see the risk of a recession remaining unusually high at the moment,” House and George wrote.