AI Summary
5 min readThe July jobs report triggered Claudia Sahm’s own recession indicator—the Sahm Rule—which has correctly signaled every U.S. recession since 1970. But Sahm, the economist who created it, says the U.S. is almost certainly not in a recession right now. Income is growing, consumer spending is growing, and jobs are still being added. The problem is that the rule was designed to turn on inside a recession, not forecast one. When it triggers outside a recession, it may still be telling us something useful—but it is also doing something it was never supposed to do.
Why the Sahm Rule might be misleading this time
The Sahm Rule works because rising unemployment is usually driven by falling demand for workers. That sets off a negative feedback loop: laid-off workers spend less, which reduces demand for other workers, which leads to more layoffs. That is the classic recessionary dynamic.
But the unemployment rate can also rise for good reasons. A sudden surge in labor supply—from immigration or people coming off the sidelines—can push the unemployment rate up temporarily, even as the economy is adding jobs. The key question is whether those extra workers eventually get hired. If they do, the economy grows faster because there are more workers producing and earning. If they do not, the negative dynamic takes over.
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What you'll learn
- 1 (00:00) **Episode Introduction & The Sahm Rule Trigger** - Host Alison Nathan introduces the central question: is the Fed behind the curve, and could it cause a recession? She frames the episode around the Sahm Rule being triggered by the weak July jobs report.
- 2 (02:28) **Claudia Sahm: How the Sahm Rule Was Built** - Sahm explains the rule was designed in 2019 to be a highly reliable, early trigger for automatic fiscal stimulus programs, not a recession forecast.
- 3 (03:57) **Why the Sahm Rule Triggered—And Why It Might Be Misleading** - Sahm confirms the rule triggered in July 2024, but argues the U.S. economy is likely not in a recession because income, consumer spending, and jobs are still growing.
- 4 (05:07) **The Recessionary Feedback Loop vs. Good Supply Shocks** - Sahm distinguishes between two reasons unemployment can rise: a demand-driven spiral (which feeds recession) and a supply-driven increase (which is positive long-term).
- 5 (07:14) **Mixed Signals: Hiring and Quitting Rates** - Sahm warns that hiring and quit rates are declining, which does signal genuine labor market weakening, even if layoffs remain low.
- 6 (09:18) **The Core Risk: An Unforced Policy Error** - Sahm’s base case is no recession, but she is increasingly worried that the Fed’s delay in cutting rates could turn a gradual slowdown into an unnecessary recession.
- 7 (13:02) **Paradox: A Strong August Jobs Report Could Be Dangerous** - Sahm says a very strong August report might slow the Fed down further, which would actually increase recession risk by prolonging restrictive policy.
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Guests on this episode
Show Notes
Many view the recent rise in the unemployment rate as a concerning sign about the economic outlook, fueling recession fears. Could the US economy fall into recession, and will overly tight Federal Reserve policy be to blame? In the latest episode of Goldman Sachs Exchanges, Allison Nathan discusses these questions with three top economic minds: Claudia Sahm, the creator of the “Sahm rule” and Chief Economist at New Century Advisors, former Federal Reserve Bank of New York President Bill Dudley, and Goldman Sachs Vice Chairman and former Federal Reserve Bank of Dallas President Rob Kaplan. This episode explores the latest Top of Mind report, “Is the Fed behind the curve?”
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