The Sahm Recession Is Here

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Commentary

In the past several years, the jobs report has proved to be one of the more interesting statistical releases from the Bureau of Labor Statistics (BLS). Reading it is a bit like playing a shell game at the county fair. You know the bean is under one of the shells but they move around so quickly that it is hard to find.

The bean, in this case, is last month’s revisions, the unemployed, the underemployed, the overemployed (multiple jobs-holders), the labor dropouts, and the displacement of native-born workers for cheaper foreign-born workers. The weakness has been apparent for a long time, but it hasn’t always been easy to find evidence of the source.

The hiding takes many forms but mostly in the huge and growing divergence between the household and payroll surveys. This gap clearly suggests double-counting and other statistical anomalies that hadn’t previously existed in the data. Put it all together, and you have something that has just smelled fishy for years. Even Fed Chairman Jerome Powell acknowledged that in testimony, but his admission was nothing new. Everyone has known about this problem.

The one piece of data that has somehow survived intact is the unemployment rate, which has been lower than one might expect. It is precisely for this reason that a recession wasn’t declared in the first two quarters of 2022, despite two successive quarters of declining real gross domestic product (GDP).

The bean counters said it couldn’t be a real recession because unemployment was still very low. That was not a very plausible excuse, but statistically, it was correct that unemployment remained low, even if dramatically underreported based on labor participation rates and work/population ratios, neither of which have recovered from lockdowns.

That situation has now officially changed. The unemployment rate has clicked up to 4.3 percent. That is not high by 21st-century standards (but it is high by 1950–60s standards) but what matters here is the trend line. It just keeps rising.

(Data: Federal Reserve Economic Data (FRED), St. Louis Fed; Chart: Jeffrey A. Tucker)

Does this imply recession? You might know my view that we never really left recession after March 2020, but that’s not what the people who are in charge of declaring one say. But as of today, we can confidently say that we are in what is known as a Sahm recession.

Named for economist Claudia Sahm, the rule is that when the three-month moving average of the unemployment rate rises by 0.50 percentage points or more relative to its low during the previous 12 months, it’s a sign that the economy is entering a recession. In that case, we have just passed this point. It’s not a perfect predictor, but it is an ominous sign of trouble on the horizon.

There were other revelations in the latest report. We depend on E.J. Antoni to run these numbers, and this time, he has come up with some striking data.

First, he wrote that “the employment level is actually flat over the last year, despite the continued rise in the number of nonfarm payrolls; we’re now about 7.3 million below the pre-pandemic trend, and getting worse each month.”

Second, Antoni said: “Note that the employment-to-population ratio has actually been trending down since at least Nov ’23 and has now fallen below where it was in Mar ’22 and early ’17 as well—no progress in 7 years.”

Third, he wrote that “employment of native-born Americans is not only millions below its pre-pandemic trend, but is 208k below its pre-pandemic level, while foreign-born employment has risen 3.9 million over the last 5 years and back on its pre-pandemic trend; Americans have been left behind.”

Fourth, Antoni again drew attention to the huge divergence between households and payrolls, one that is getting worse.

In short, it has been very obvious for four years that the labor markets are broken. This is despite the unrelenting claims of mainstream media that jobs are booming and that all is well. On the ground, most people have known that this is not true. You can even see it in the level of quits. They were high two years ago as some sectors were doing well but now people are clinging to jobs.

Everyone watching this data knew that the cracks would eventually show in the headline number. Now, they have, and it confirms economic weakness in a way that not even the mainstream press can deny.

Beyond that, we are getting ever more information about what’s behind the alleged fix to inflation. An X account of a quantitative analyst at a health care firm showed his work using AI. He took two simple steps to adjust the official Consumer Price Index. First, he replaced “Owner Equivalent Rent”—the BLS’s way of calculating home prices—with median house prices themselves. Second, he added in interest rates, which are usually excluded.

The results? Just making these two adjustments, we come up with a 127 percent inflation over four years. I asked the scientists about other adjustments, adding in health insurance and homeowner’s insurance, plus cars without hedonic adjustments, plus shrinkflation and fees. Airline prices, for example, are posted as flat, but everyone knows that this isn’t true once you consider all the added baggage and seating fees.

The analyst wrote me privately that he would not be surprised if making further adjustments would drive the inflation rate to 150 percent to 200 percent over four years.

Consider what the real GDP would look like if you bumped those kinds of numbers against output, which has been barely growing in any case. What you end up with is exactly what I’ve suspected: The recession has been going on for four years. And now it is getting worse. At some point, we’ll be beyond the denial point.

That’s when the Fed has its real problem. It wants to lower rates to stop this, but it cannot do so without reigniting inflation. It might choose to do so in any case. If that is true, we might be over the first wave and ready to enter the second wave.

Views expressed in this article are opinions of the author and do not necessarily reflect the views of The Epoch Times.