Strong Job Growth in May, but the Unemployment Rate May Be Signaling a Recession

June 7, 2024

The U.S. economy added far more jobs than expected last month, likely delaying Federal Reserve policymakers’ impetus to cut interest rates, but an increase in the unemployment rate could be signaling an economic slowdown on the horizon. 

The nation’s employers added 272,000 jobs in May, according to the Labor Department’s Bureau of Labor Statistics. That is up from April’s 165,000 and well ahead of the 190,000 that economists polled by Dow Jones had expected.

At the same time, the unemployment rate climbed to 4%, its highest level since January 2022. Economists had been expecting the unemployment rate to hold steady at April’s level of 3.9%.

While the uptick in the unemployment rate was small and unemployment remains low by historic standards, the recent increase may be pointing to a recession. 

The Sahm Rule, a recession indicator, triggers when the three-month average unemployment rate increases by 0.5% or more from its lowest point in the past 12 months. The rule has a near-perfect track record, predicting every recession the U.S. has seen since 1950 with only one false positive.

The three-month moving average unemployment rate was 3.9%. The lowest point for the three-month average in the past 12 months was 3.5% in July. That is a gap of 0.4%, just shy of the 0.5% increase that would trigger the rule, which may suggest an economic slowdown on the horizon. It should be noted that Claudia Sahm, the economist who first identified this dynamic, has warned that her rule may not apply in this instance, as the post-pandemic recovery has thoroughly distorted the typical economic cycles.

Still, the uptick in unemployment came even as the labor force participation rate declined to 62.5%, down 0.2 percentage points from the month prior. A more encompassing unemployment figure that includes discouraged workers and those holding part-time jobs for economic reasons held steady at 7.4%.

The report also showed that average hourly wages were higher than expected, climbing 0.4% from the month prior and 4.1% on an annual basis. Economists had been expecting increases of 0.3% and 3.9%, respectively.

With strong job growth and robust wage gains both moving in the opposite direction of what the Fed needs to begin easing, the report all but eliminates the possibility of an interest rate cut in July.

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