Tonight, will the non-farm payrolls foreshadow a "US recession"?

Tonight's U.S. non-farm payrolls will face a critical moment.

Overnight, affected by the continued softness of the U.S. job market and the impact of manufacturing contraction, investor concerns have escalated: for the week ending July 27, initial jobless claims exceeded expectations, and the U.S. ISM Manufacturing PMI for July was 46.8, the largest contraction in eight months, intensifying market concerns about a U.S. economic recession. U.S. stocks, influenced by this, all fell.

Now, investors are anxiously awaiting the heavyweight July non-farm payroll data.

At 8:30 pm Beijing time tonight, the U.S. July non-farm employment data will be released. If this non-farm data shows that the U.S. unemployment rate continues to rise in July, it may trigger the Sahm Rule's economic recession warning. Since 1970, this indicator has had an accuracy rate of 100%.

According to the Sahm Rule, when the 3-month moving average of the unemployment rate rises by 0.5% or more compared to the lowest point of the previous 12 months, the U.S. economy will enter a recession. Since 1970, this law has had an accuracy rate of 100%.

In other words, if the U.S. unemployment rate rises to 4.2% in July, it will trigger the Sahm Rule's economic recession warning.

However, economists surveyed by Dow Jones Newswires expect the July unemployment rate to remain at 4.1%, avoiding triggering the Sahm Rule.

Sahm Rule

The Sahm Rule was proposed in 2019 by economist Claudia Sahm to help the U.S. government understand when an economic recession might occur, in order to formulate loose policies to help families through difficult times. Therefore, it is widely regarded as a reliable indicator for predicting economic recessions.

In recent months, as the U.S. unemployment rate has gradually risen, concerns about the U.S. labor market conditions have also increased.

The June non-farm report showed that the U.S. unemployment rate rose further from 4% in May to 4.1% in June, with a Sahm Rule value of 0.43%, approaching the 0.5% caution line. In early July, Sahm stated:

The Federal Reserve is taking a big risk by not gradually lowering interest rates now. If no action is taken, it may trigger the "Sahm Rule," leading to an economic recession, which may force policymakers to take more aggressive action.

However, some analysts question the reliability of the Sahm Rule

In recent years, due to the Federal Reserve's continuous rate hikes and maintaining interest rates at high levels in hopes of curbing inflation, some economists have predicted that a U.S. economic recession is imminent. After all, historically, high interest rates increase the borrowing and spending costs for businesses and individuals, eventually causing the economy to plummet.

However, some economists point out that the current economic situation in the U.S. is unusual, and reliable economic recession indicators in the past have also issued incorrect warnings. For example, in 2022, the inversion of the 2-year and 10-year U.S. Treasury yields implied an impending recession, but the U.S. economy has not yet entered a recession.

Another leading economic indicator, the LEI compiled by the Conference Board, also signaled in early 2022 that the U.S. was on the edge of an economic recession, but it seems to have also failedSo some market participants are cautious about related economic recession forecasting indicators.

During a press conference on Thursday, Fed Chairman Powell was also asked about his views on the Phillips Curve, but he did not directly answer, instead more tactfully stating, there is no need to overly worry about the current unemployment rate:

Never assume that the economy will remain unchanged, we need to understand that in the post-pandemic era, many rules you know have become obsolete. The inflation caused by the economic shutdown, as well as interruptions in the supply chain in the face of very strong demand, is indeed unusual, or unprecedented.

The labor market is not as bad as it seems, because the current employment situation is very complex. The rise in the unemployment rate is not just because people are being laid off, but because there are more people willing to work who are still actively looking for jobs, so a slight increase in the unemployment rate is not a cause for alarm.

With strong demand for labor, after hitting a near 50-year low last year, the unemployment rate is still close to the pre-pandemic average level.

Sarah House, an economist at Wells Fargo Securities, stated that if the recent increase in the unemployment rate is confirmed to be a normal rebound from the extremely low levels caused by the unique economic situation after the pandemic, rather than an early sign of an economic recession, then the Phillips Curve will not be the only malfunctioning signal in this economic cycle.

However, caution is still needed, as the momentum in the labor market is difficult to change in the short term. We believe that the risk of an economic recession is still very high at present