Despite a brief respite entering 2024, the United States is once again on a “recession warning.” This time, economists are not focusing on the usual indicators such as an inverted Treasury market yield curve or low consumer and business sentiment. Instead, they are looking at rising unemployment rates in several states as a potential sign of an impending recession – or one that may already be here.
One of the primary reasons for these warnings is a recession indicator known as the Sahm rule, developed by an economist. The premise of this rule is simple: if the three-month average of the unemployment rate is half a percentage point or more above its low in the prior 12 months, it indicates that the economy is in a recession. When applied to individual states, this rule suggests that 20 of them should be in a recession, as they collectively account for more than 40% of the US labor force, including California, which alone represents 11%.
The implications of these warnings are significant, as a recession in even just a few states could have a ripple effect on the broader economy. It is essential for policymakers and businesses to closely monitor these indicators and take appropriate actions to mitigate the potential impact of a downturn. Only time will tell whether these warnings are accurate, but it is crucial to be prepared for any economic challenges that may lie ahead.
