Another important leading indicator has been triggered! How far away is the US recession?

Overnight US employment data reflects labor market cooling again, and the economic recession indicator "Dudley Rule" has been triggered.

Wall Street News previously mentioned that due to the rising unemployment rate, the market has been closely watching the "Sahm Rule" indicator in recent days. When the 3-month average of the unemployment rate rises by more than 0.50 percentage points above the lowest value of the past 12 months, a recession will be triggered.

According to the latest research report released by JP Morgan, the three-month average unemployment rate as of June was 4%, which is 0.46 percentage points higher than the lowest point of the previous twelve months, but 0.5 percentage points higher than the cyclical low of 3.5%.

This means that the current unemployment rate is "one step away" from triggering the Sahm Rule, but has already triggered another recession indicator.

Even before the popularity of the Sahm Rule, former New York Fed Chairman Bill Dudley often cited another rule similar to the Sahm Rule to measure economic recession - the "Dudley Rule" - when the 3-month moving average of the unemployment rate is at least 0.3 percentage points higher than the low point during the expansion period, the economy will (within 6 months) fall into a recession.

How far is the US from a recession?

Does this mean that the US economy is on the brink of a recession?

JP Morgan did not give an opinion, but the report provided two reasons, aiming to demonstrate the uniqueness of the current US employment situation.

Firstly, theoretically, the Sahm Rule has had an accuracy rate of 100% since 1960, and the report states that this law is based on the theoretical premise that "once the unemployment rate rises significantly, it will continue to deteriorate." However, in practice, there is no set of standard economic principles that can fully explain this premise.

The report further adds that countries with market systems similar to the US, such as Canada and Australia, have also experienced situations where the average unemployment rate exceeded the 0.5% threshold without further deterioration.

Secondly, there is a phenomenon in the current labor market: some companies have been reluctant to lay off employees in the past four years due to difficulties in recruiting, leading to a low layoff rate.

However, this alone is not enough to put pressure on the rising unemployment rate.

According to the view of Robert Shimer, an economist at the University of Chicago, the impact of the job vacancy rate accounts for three-quarters of the US unemployment rate, while the impact of the quit rate accounts for one-quarter, and "the job vacancy rate has a strong pro-cyclicality. The counter-cyclicality of the job exit probability is weak."

This view is also supported by data. Starting from 2000, JOLTS employment data shows that the layoff rate explains only 44% of the change in the number of people receiving unemployment benefits, while the hiring rate explains 72% of the unemployed. This means that even if the phenomenon of layoffs is not obvious, a decrease in hiring may lead to an increase in the unemployment rate