US Labor Market Remains Contradictory – Recession Fears Increase

The latest labor market data from the U.S. have significantly missed expectations, resulting in a rise in the unemployment rate, which is being interpreted as a sign of an impending recession. Despite this negative development, the economy remains resilient: The country's gross domestic product continues to grow, and employment trends reflect the unusual forces that dramatically altered the labor market during the COVID-19 pandemic. These unique circumstances have led most economists to believe that the so-called "Sahm Rule" is currently not applicable. This rule, named after the renowned economist Claudia Sahm, has predicted every recession over the past five decades. It essentially states that the economy enters a recession when the unemployment rate, based on a three-month average, rises by half a percentage point above its lowest point in the past 12 months. The current increase in the unemployment rate from 4.1% to 4.3% in July technically meets the criteria of the Sahm Rule. Nonetheless, many experts point out that current conditions are extraordinary. The labor market is still influenced by numerous individuals who left their jobs during the pandemic and are now seeking employment again due to higher wages. Additional factors include new entrants into the workforce: Estimates from RBC Capital Markets suggest that about one-third of the 3 million new jobs in the past year have been filled by newly immigrated workers. According to Goldman Sachs, new immigrants often initially face greater challenges in finding work, which also contributes to the higher unemployment rate. Other market developments include a significant drop in the Dow Jones by 900 points on Monday. This notable event has heightened concerns about a potential economic downturn, even though the combination of rising unemployment and continued GDP growth remains unusual.