Sahm Rule Recession Reaching Trigger Point? Five Key Charts for Labor Market Insights

Fed Chair Powell’s remarks at his recent semiannual testimony to Congress highlighted the Fed’s growing attention to the job market. In this article, we look at five key charts to assess weakness in the U.S. labor market and the potential implications for stock market outlook and rate cut prospects.

Key Points:

1. Job Openings vs. Unemployment Level: labor demand has cooled down to pre-pandemic levels.
2. Unemployment Rate & Sahm Rule Recession Indicator: unemployment rising gradually, with the Sahm Rule Recession Indicator nearing the recession threshold.
3. Initial & Continuing Jobless Claims: both are rising, reflecting a less robust labor market.
4. Employment Level per Business vs. Household Survey: divergent trends between the two surveys signal likely slowdown in monthly nonfarm job gains.
5. Hourly Wage Growth: wage growth back below 4%, indicating labor market tightness has eased, raising odds of Fed rate cuts.

Introduction

In our analysis on the U.S. labor market back in 2022, we discussed the concept of the Beveridge curve. At the time, we noted the labor market (at the time) was sitting on the steep segment of the curve and would be sliding down from the top left as supply and demand in the job market rebalanced with the post-COVID recovery, based on which we forecasted a soft-landing scenario characterized by significantly reduced job vacancies without spiking unemployment. This is also why, over the past two years, we have consistently maintained that the U.S. economy is unlikely to slip into a recession, and this scenario has indeed held up over the past two years.

However, as we enter 2024, the U.S. labor market has been moving towards the flatter segment of the Beveridge curve. Reduced steepness indicates more balanced labor supply and demand; it also means further slowdown in demand could cause a notable increase in unemployment. The latest U.S. jobs report for June saw an uptick in the unemployment rate to 4.1%. So what’s the current state of the labor market? Is it indeed showing weakness as the Beveridge curve suggests? In this article, we break down five key charts for assessing the conditions of the U.S. labor market.

1. Job Openings vs. Unemployment Level: Labor Market Dynamics Back to Pre-Pandemic Levels

Let’s first look at the job openings rate, represented by the Y-axis of the Beveridge curve. Job openings have been a downward trend since the Fed embarked on a rate hike cycle in March 2022, coming down from an elevated level, and reflecting that the tightening monetary policy has effectively eased labor market tightness.

We can also look at the ratio of job vacancies to the number of unemployed persons, which shows that, more than a year ago, there were 2 job openings for every American job seeker. This was also why we repeatedly emphasized that a recession was unlikely, as job seekers were not struggling to find work; rather, there were too many job opportunities. Now, this ratio has come back down to 1.2 in May, and the May job vacancy data, in both absolute terms (8.14 million openings) and as a percentage (4.9%) clearly indicates that labor market tightness is easing and returning to balance.

It is important to note that when job openings are at abnormally high levels, such was the case coming out of the pandemic, a slowdown in labor demand will first be reflected as a rapid decline in job vacancies. However, now that job vacancies have returned to relatively normal levels, any further slowdown in labor demand is likely to translate into reduced employment, that is, an increase in and an end to the currently low unemployment rate. In the next section, let’s examine if that’s indeed what has happened.

2. Unemployment Rate & Sahm Rule Recession Indicator: Unemployment Gradually Rising, Recession Indicator Reaching Trigger Point

Next, let’s turn to the unemployment rate, which is represented by the X-axis of the Beveridge Curve. As noted above, when ...

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