Unemployment rise spurs fears of slowdown, yet recession signals have been wrong — so far

WASHINGTON (news agencies) — A surprising rise in the U.S. unemployment rate last month has rattled financial markets and set off new worries about the threat of a recession — but it could also prove to be a false alarm.

Friday’s jobs report, which also showed hiring slowed last month, coincides with other signs the economy is cooling amid high prices and elevated interest rates. A survey of manufacturing firms showed activity weakened noticeably in July. Hurricane Beryl, however, hit Texas during the same week the government compiles its job data and could have held back job gains.

The U.S. economy used to flash reliable signals when it was in or near a recession. But those red lights have gone haywire since the COVID-19 pandemic struck and upended normal business activity. Over the past two or three years, they’ve signaled downturns that never arrived as the economy just kept rolling along.

Worries about a recession are also quickly politicized, even more so as the presidential election intensifies. Former President Donald Trump’s campaign on Friday said the jobs report is “more evidence that the Biden-Harris economy is failing Americans.”

For his part, President Joe Biden said that since he and Vice President Kamala Harris took office, the economy has added nearly 16 million jobs, while the unemployment rate fell to half-century lows. Some of those job gains reflect a bounce-back from the pandemic, but the U.S. now has 6.4 million more jobs than it did before COVID-19.

Even so, Friday’s report from the U.S. Labor Department is raising recession fears again. The Dow Jones average tumbled more than 700 points, almost 2%, in afternoon trading Friday, and the broader S&P 500 fell 2%.

Markets likely panicked in part because when the unemployment ticked up to 4.3% last month — the highest since October 2021 — it set off the so-called Sahm Rule.

Named for former Fed economist Claudia Sahm, the rule holds that a recession is almost always underway already if the three-month average unemployment rate rises by half a percentage point from its low of the past year. It’s been triggered in every U.S. recession since 1970.

But Sahm herself doubts that a recession is “imminent.’’ Speaking before the numbers came out Friday, she said: “If the Sahm Rule were to trigger, it would join the ever-growing group of indicators, rules of thumb, that weren’t up to the task.’’

Other previously trustworthy recession indicators that have flopped in the post-pandemic era include:

— A bond market measure with a dry-as-dust label: The “inverted yield curve.’’

— The rule of thumb that two consecutive quarters of falling economic output amounts to a “technical recession.’’

On Wednesday, Federal Reserve Chair Jerome Powell said he is aware of the Sahm Rule and its implications, but noted that other recession signals, such as changes in bond yields, haven’t been borne out in recent years.

“This pandemic era has been one in which so many apparent rules have been flouted,” Powell said at a news conference. “Many received pieces of received wisdom just haven’t worked, and it’s because the situation really is unusual or unique.”

Powell spoke after Fed officials kept their key interest rate unchanged but signaled that they could reduce the rate as soon as their next meeting in September.

Powell also downplayed the impact of the Sahm Rule, calling it a “statistical regularity.”

“It’s not like an economic rule where it’s telling you something must happen,” he said.

For four years, economists have struggled to make sense of an economy that was first shut down by the COVID-19 pandemic, then roared back with such strength that it revived inflationary pressures that had lain dormant for four decades. When the Federal Reserve moved to tame price increases by aggressively raising interest rates starting in March 2022, economists almost uniformly predicted that the higher borrowing costs would cause a recession. It never came.

Post-pandemic trends in the American jobs market may have at least temporarily sapped the Sahm Rule of its potency.

Unemployment has been rising steadily not so much because companies are slashing jobs but because so many people have poured into the job market. Not all of them have found work right away. The new arrivals have been dominated by immigrants — many of whom entered the country illegally. They are less likely to respond to Labor Department jobs surveys and therefore can go uncounted as employed.