Founder of the Sam Rules: The employment market's recession alarm is just a false alarm

Even economist Claudia Sahm admits that her namesake recession indicator is not always a guarantee of an economic downturn.

Former Fed economist Sahm developed the so-called Sahm Rule in 2019. This rule is typically a signal that an economic recession is imminent, and has been particularly scrutinized this year as the Fed tries to curb inflation without pushing the economy into a recession. This has landed her on MarketWatch's list of the 50 most influential market participants.

Historically, the Sahm Rule indicates that the initial phase of an economic recession begins when the three-month moving average of the U.S. unemployment rate rises by 0.5% or more from a 12-month low.

The rule was triggered by the July nonfarm payroll report. Experts generally expect that once the rule is triggered, the economy will continue to deteriorate. However, Sahm pointed out that the economic conditions in recent years have not been typical, and although the rule still flashed a warning after the September nonfarm payroll report, its reading was only 0.5%, "right at that threshold," she said.

"Historically, this rule is not perfect," Sahm said in an interview with MarketWatch, "If you go back to the 50s and 60s, you can find times when its warning light went on and off."

She also said, "The current labor market and economy have many unusual features, and if, like many other indicators, the Sahm Rule is to be broken, this might be the time."

Typically, when the Fed raises interest rates rapidly to combat inflation, the economy staggers as businesses and consumers cut back on spending. However, in the past two years following the COVID-19 pandemic, the economy has ignored concerns about inflation.

If the unemployment rate remains in the low range of 4%, which is the current level, "that's not a recession, it's a healthy labor market," Sahm said.

"This (Sahm Rule) is not a guarantee, just a rule of thumb," she added, "This time really could be different."

The closely watched unemployment rate rose from a low of 3.4% in April 2023 to 4.1% in September. Sahm noted that this increase is concerning, but partly reflects significant labor market fluctuations and uncertainty among businesses about whether expansion is wise.

She said, " There is currently no economic recession, and as far as we know, we are not on the brink of an economic recession."

Many economists believe that the U.S. economy has not yet emerged from its difficulties.

Richard Moody, chief economist at Regions Financial, said that due to seasonal adjustment factors, the unemployment reports have been unusually volatile since the summer, and there are early signs that the October report may be "significantly soft."

He said that behind these contradictions, job growth is clearly slowing down.

But Moody said, "This is different from a labor market collapse, as the data has not shown any signs of that yet." Despite a healthy labor market, Sam stated that she expects the Federal Reserve to continue to gradually cut interest rates, but is unlikely to make a significant 50 basis point cut like in September.

Sam, when discussing the Federal Reserve, stated that such a decision "will reaffirm policymakers' commitment to achieving a dual mandate," which includes lowering inflation and maintaining a relatively strong labor market.

Although the Federal Reserve has been successful in curbing inflation so far, Sam acknowledged that consumers may not view the economy as positively as experts do.

She said, "The overall picture of these numbers is very important for us to understand the situation, but they do not represent individual circumstances."