Unemployment Rise Nearly Triggers Recession Warning As Job Growth Slows

November 4, 2023

The U.S. labor market entered the Fall with a bit of a chill.

Employers added 150,000 jobs in October, half the previous month’s gain and the smallest monthly increase since June, according to the Labor Department’s latest jobs report. 

Some 50,000 workers were removed from payrolls amid a wave of strikes among autoworkers, warehouse and transportation workers, and film and TV actors, but just three sectors—healthcare, government, and leisure and hospitality—saw net job growth last month. That is a far cry from the broad-based gains that have been seen this year, and some analysts are saying that this may be the turning point for a labor market that has proven extremely resilient in the face of the Federal Reserve’s efforts to slow the economy.

The unemployment rate rose to 3.9%, which is up half of a percentage point higher since April. That half-point increase is important, as the month’s jump in employment puts it right on the verge of triggering a reliable recession indicator.

The so-called “Sahm Rule” has accurately predicted every recession since 1960. The rule, created by former Federal Reserve economist Claudia Sahm, posits that a recession starts when the three-month moving average of the unemployment rate rises by a half-percentage point or more from its lowest point during the previous 12 months. 

October’s 3.9% unemployment rate averaged with two readings of 3.8% in August and September means the three-month average is 3.83, just shy of the 3.9% that would represent a half-point increase from 3.4%, the lowest that unemployment has been in the past 12 months. 

For her part, Claudia Sahm worries that she may have created “a monster” with her rule, and acknowledged that, despite its strong track record, it is not infallible and that the current economy is so idiosyncratic that her rule may not apply. Speaking to Bloomberg, Sahm said, “If it was ever going to break it would be now, and I would be so happy to see it break.”

Read all Blog posts