Originator of "Sam Rule": U.S. economy is "very close" to recession

US stocks opened on Monday with a panic sell-off. Claudia Sahm, the former Federal Reserve economist who proposed the "Sahm Rule," stated that although the US has not entered a recession yet, it is "very close," and predicted that Fed policymakers may adjust their strategies to address the increasing risks.

Media reports quoted Sahm on Monday regarding the unexpected rise in the unemployment rate in the July non-farm payroll report:

"The rise in the unemployment rate this time is consistent with the 'early recession' in the past. We may not have reached that stage yet, but we are getting very close to this situation, which is worrying."

The July non-farm payroll report showed a significant slowdown in hiring in the US, with the unemployment rate rising to 4.3% in July. This caused its three-month moving average to rise by 0.6% from the 12-month low, triggering the so-called Sahm Rule. According to the Sahm Rule, if the unemployment rate (based on a three-month moving average) rises by 0.5 percentage points from the previous year's low, an economic recession has begun. This indicator has had a 100% accuracy rate since 1970.

Sahm said, "We are indeed entering this situation from a relatively strong position overall. It is difficult to say that we are in a recession when we look at all the conditions of the US economy that we currently understand."

Before the release of the non-farm payroll report last Friday, Fed Chairman Powell stated last Wednesday that the "overall range of data" so far indicated that the labor market was "normalizing." He pointed out that the indicators for the first half of the year "did not show signs of economic weakness," mentioning low levels of layoffs, "solid" spending, and increased investment.

Sahm stated that with the recent financial market turmoil, the possibility of that "frightening word" becoming more likely in many people's eyes, immediate action by the Fed to address escalating risks may not be appropriate. "It is important to remain calm at times like this."

"The Fed's actions are slow and cautious, which is a good thing. What we least need is for them to join that emotional energy," Sahm added.

At the same time, Sahm also mentioned that Powell and his colleagues may consider changes in the economy and the markets.

Sahm stated, "The Fed is very cautious, and actions may be very slow. But when the facts change and the Fed understands the situation, they will take action and do what is necessary."

With the Fed's benchmark interest rate currently in the target range of 5.25% to 5.5%, Sahm stated that Fed policymakers are "now in a position to take quite a few measures."

Due to weak economic data, lackluster earnings reports from tech giants in the second quarter, and renewed concerns about economic recession due to geopolitical tensions, Wall Street's major indices plummeted on Monday, weakening hopes for a soft landing.

The three major US indices opened lower on Monday, with the Nasdaq falling by 6.35% in early trading, the S&P 500 down by 4.09%, the Dow Jones down by 2.69%, and the Russell 2000 down by 5.84%. Among the major sector ETFs in the US stock market, AI and robotics, technology, electric vehicles, banking, and oil and gas sectors led the declines. The "FAANG" stocks fell by 9%, marking the largest drop since 2015