The July jobs report fell short of expectations, with employers adding only 114,000 workers last month, well below the forecasted 175,000 gain. This disappointing news, coupled with an unexpected rise in the unemployment rate to 4.3%, has raised concerns about the health of the U.S. economy and sparked a sharp market sell-off.
The so-called Sahm rule, named after former Federal Reserve economist Claudia Sahm, has successfully predicted every recession since 1970. This rule suggests that the economy is in the early stages of a recession when the three-month moving average of the jobless rate is at least a half-percentage point higher than the 12-month low. With the unemployment rate averaging 4.13% over the past three months, 0.63 percentage points higher than last July, the rule has been triggered, indicating a potential economic downturn.
However, Sahm has noted that the rise in unemployment may not necessarily lead to a recession this time around, citing an increase in available workers rather than layoffs. Despite this, there are growing concerns about the weakening economy, particularly in the face of ongoing inflation and high interest rates.
As a result, policymakers are considering interest rate cuts to stimulate the economy. The Federal Reserve held rates steady at a two-decade high in their recent meeting but may cut rates at their next meeting in September. Investors are now anticipating a larger rate reduction due to the slowdown in job growth and increasing recession fears.
The stock market reacted negatively to the jobs report, with major indices plunging on Friday morning. The Dow Jones Industrial Average dropped over 900 points, the Nasdaq entered correction territory, and the S&P 500 slid 2.6%. This data highlights the fragility of the economy and the need for swift action to prevent a potential recession.