The ‘R’ word: Why this might be the exception to the key recession rule

Unemployment rose sharply in October, but layoffs remained few.

Joe Reddell/Getty Images

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Joe Reddell/Getty Images

Unemployment rose sharply in October, but layoffs remained few.

Joe Reddell/Getty Images

October’s unemployment rate sounded alarm bells in some quarters. That’s because it’s half a percentage point above recent lows — a jump that, according to the rule of thumb, signals the start of a recession.

The monthly jobs report showed the U.S. unemployment rate was 3.9% in October, very low by historical standards but up from 3.4% in April.

That’s why this is cause for concern, but may not be as alarming as it seems.

The Sahm Rules have followed a pattern since 1970

The rule was developed by former Fed economist Claudia Sahm, who observed that every time since 1970 the unemployment rate rose by a half percentage point or more from the previous year’s low, This marks the beginning of the economic recession.

The logic of this rule is simple: when people lose their jobs, they spend less, which puts pressure on businesses to lay off workers, and the downward cycle continues. Once the unemployment rate jumps half a percentage point, it usually keeps climbing — at least 2 points, sometimes more.

But Sam said this time might be different.

“Experiential patterns are not laws of nature,” Sam told weekend edition sunday. “Rules are meant to be broken.”

Why this time might be different

First is math. Sam’s rule is not based on the monthly unemployment rate but on a three-month rolling average. While that’s up from April’s lowest levels, it’s not up half a percentage point — at least not yet. So the alarm bells haven’t sounded yet.

What’s more, much of the recent rise in unemployment is not because people are losing their jobs, but because new people are entering or re-entering the labor force. There are more people working in October than in April.But because the number of people has decreased usable Jobs are growing faster and unemployment is rising.

This is unlikely to trigger the negative feedback loop of layoffs and spending reductions that Sam’s rule is based on.In fact, personal spending remains surprisingly strong — helping GDP grows rapidly July, August and September.

But we’re not out of the woods yet

However, it’s unclear how long this pace of spending can be sustained.The Federal Reserve has sharp interest rate hike To curb inflation.this is already Putting the brakes on the real estate marketmay also slow down the development of other economic sectors.

Many people have been relying on borrowing money to support their spending. Credit card debt rises to record $1.08 trillion autumn. The number of people who are behind on their credit card bills has been increasing.

“I’m a macroeconomist, so I’m pessimistic about my thinking,” Sam said. “We want to hope for the best but prepare for the worst. I can help people prepare.” The way to do that is to fully understand what’s going on.” The economy is happening. “

Many forecasters still believe a recession may be coming. But at least for now, there is no requirement that this be the case.

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