What you’re not hearing about the Sahm Rule predicting a recession

The latest recession scare is the Sahm Rule, which predicts recession when the three-month moving average of the unemployment rate rises by 50 bp. The track record is decent, with no false positives and only two late calls. But payrolls has a better record, and a stronger logical rationale. The recent rise in the unemployment rate from April’s lows has been due more than entirely by new entrants to the labor force, who came in as job-seekers no job-holders. A growing labor force is a sign of robust economic growth, but it does produce unemployed persons until they can find jobs. Since the April bottom in the unemployment rate, total employment has risen, so it’s not a matter of employed persons losing their jobs. The unemployment rate is up 49 bp since April, and the three-month moving average is up 33 bp. So the Sahm Rule recession scare is unfounded on the face of it – the rule hasn’t even given a signal.