7 minute read
Over the past few months, I’ve shared my concerns about a possible recession and the overall state of the U.S. economy.
Maybe you remember reading my piece about the shaky job market (check it out here). Or the one about the alarming surge in consumer debt delinquencies (read here). Or the bit on 'real' retail sales being stuck in neutral for three years (read here).
Sure, I might’ve sounded like a pessimist.
But let’s be honest - aren’t you glad someone had the guts to lay it out?
Well, it seems like my doubts weren’t misplaced, especially after Wednesday’s revised employment numbers – the worst since the 2008-2009 crisis.
So yes, a little pessimism was justified. The U.S. economy looks even weaker than the so-called experts predicted (shocking, I know).
Now all this makes me wonder: are we already in a recession? And if so, is the Federal Reserve going to cut interest rates deeper than expected?
Let’s break it down.
Biggest Payroll Revisions Since 2009 – Are Job Losses Signaling a Late 2024 Economic Downturn?
They revised the job numbers down by 818,000 for the year through March — meaning about 68,000 fewer jobs each month than previously reported.
Figure 1: Bloomberg, August 2024
"Wait, what do 'revisions' mean and why is this so significant?"
Well, here’s the deal.
Every month, the government tallies up how many people have jobs. But sometimes, they mess up the count - big time. Later, they realize this and go back to fix the numbers. That’s what a "revision" is.
The revision we're talking about here means the government grossly overestimated the number of workers. Thus, when they took a closer look, they found out they had counted over 800,000 more jobs than were actually there. So now, they’re adjusting the numbers down.
And this matters because the number of jobs is like the economy’s scoreboard. If the score was too high before and now it’s lower, it means the economy might not be as strong as we thought. And just to put this in perspective, the last time they had to revise the numbers this much was back in 2009. . . and that wasn’t exactly a great year, was it?
And this is a huge deal because, as I’ve written to you about before, employment is a "lagging indicator" in economics.
- It’s like a rearview mirror. It shows what’s already happened but after the fact. Thus, lagging indicators, like job numbers, confirm what’s behind us - not what’s ahead. By the time we see the change, the economy has already shifted, sometimes months before.
So, by the time we see this data, it implies things turned sour many months ago.
Now there’s no other way to put this besides the job market saw a massive decline compared to what was first reported.
But it’s not just the backward data that’s troubling – it’s also the “leading indicators” that show further stress about where the labor market is heading.
- And like Wayne Gretzky said, "a good hockey player plays where the puck is. A great hockey player plays where the puck is going to be."
The Sahm Rule: This Historically Accurate Labor Indicator Is Flashing Red
In short, The Sahm Rule is a straightforward but sharp tool to spot the beginning of a recession by watching changes in the job market - specifically with the unemployment rate.
Claudia Sahm, the former Federal Reserve economist behind it, designed the rule to catch the early warning signs.
In essence, when the three-month average of the unemployment rate climbs by 0.5 percentage points or more from its lowest point in the last year, it’s a red flag.
Why does it matter? Because the Sahm Rule gives a heads-up when the economy is about to go south.
It’s a powerful indicator because it’s not just about how many people are out of work (like what the unemployment rate shows); it’s about how fast that number is growing (the rate of change).
And it's been a reliable indicator, flagging every recession since the 1970s.
So, what’s the Sahm Rule showing us today?
Well, as of the latest data from July, it’s surpassed that dangerous threshold of 0.5 percentage points.
- It’s now 0.53 percentage points - up from 0.43 in June (note that the shaded lines in the below chart are recessions)
Figure 2: St. Louis Federal Reserve, August 2024
But now, just two days ago, it looks like she’s shifted gears. She went on Bloomberg Television and said a 50 basis-point cut by the Fed in September wouldn’t be a mistake3. In fact, it might be just what the Fed needs to recalibrate and get back on track.
Quite a flip-flop if you ask me.
But still, something to keep in mind.
The “Real” U.S. Unemployment Rate Has Surged
While the "headline" unemployment rate (aka U-3) has ticked up higher and higher all year – hitting 4.3% in July (the highest level since November 2021) – it’s the U-6 rate that really matters.
Why? Because the U-6 unemployment rate digs deeper than the usual U-3 rate.
While the U-3 only counts people actively looking for work in the last four weeks, the U-6 includes those who’ve given up searching, those who’ve looked for work in the past year, and part-timers who want full-time gigs but can’t find them.
This broader measure captures underemployment and the real struggles out there, giving a fuller picture of the labor market’s rough patches and the true state of the economy.
Put simply, in the eyes of policymakers, the U-6 isn’t just a number - it’s a reality check on the overall labor market.
So, how does the U-6 rate look?
Well, it’s at 7.8% as of July 2024 – up from 6.7% this time last year.
Figure 3: Trading Economics, August 2024
The much bigger rise in the U-6 rate is a worrying sign because it points to more than just unemployment.
It shows deeper economic trouble – such as people stuck in part-time jobs when they need full-time work, and others who’ve given up looking altogether.
This isn’t just about losing jobs. It’s about a workforce struggling on all fronts. And that kind of struggle can hit the economy hard, shaking its stability and slowing down growth.
Beware.
The Impending Reality: Are We Already in a Recession?
The signs are becoming more clear: we might already be in a recession.
The data revisions, the alarming rise in both the U-6 unemployment rate and the Sahm Rule threshold are all flashing serious warnings.
Put simply, the job market is weaker than reported, underemployment is rising, and the economy’s cracks are widening.
The Federal Reserve might need to act fast, possibly with a significant rate cut, to steer us back on course. And in my opinion, this could happen as soon as September, even if it means keeping inflation elevated and creating other issues.
However, I remain skeptical that some marginal rate cuts will be enough to reverse this trend - especially since most of this data is lagging anyway (aka it may already be too late).
The question now is: how deep can this downturn go, and what will the ripple effects be?
As always, time will tell.
Sources:
1. US Payrolls Seen Revised Down by 818,000 After Delayed Data
2. My recession rule was meant to be broken (moneycontrol.com)
3. Claudia Sahm Sees ‘Absolutely a Case for a 50 Bps Cut’ - YouTube
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