Lower for Longer Unemployment Reaches 70 Year Milestone

In an era where economic indicators are scrutinized with increasing fervor, the current landscape offers a blend of optimism and caution. Unemployment, a perennial bellwether of economic health, has been enjoying a prolonged slumber below the 4% mark, reminiscent of a bygone era in the 1950s and 60s. Against this backdrop of plentiful jobs and positive inflation-adjusted wage growth over the past year, the public remains haunted by recent inflation spikes.

For those in the financial realm, perpetually hunting for omens of market shifts, skeptical Bulls have foisted a novel metric – the Sahm Rule. Introduced by economist Claudia Sahm in 2019, this unsophisticated rule aims to sound the alarm when an economic recession is impending. However, as with many predictive models, its efficacy hinges on historical data and rear-view insights. With a hindsight track record averaging total perfection over the past 60 years, some are on the airwaves this year pushing – perhaps hoping – this indicator will panic investors. The Sahm rule requires a move above the 0.5% level which is computed by comparing the value of the three-month moving average unemployment rate to the value of the lowest three-month moving average unemployment rate over the last 12 months.  Before you doze off, the Sahm Rule at 0.37 today has not triggered and may require an unemployment rate closer to 4.5%. Amidst discussions of recession triggers and economic cooling, the underlying strength of the labor market provides a reassuring counterbalance. With a pace of 2.9 million jobs slated for creation this year, there are no immediate warning signs flashing. 

There can be no recession without a surplus of labor. For several years the extremely elevated number of job openings emphatically illustrated a massive labor shortage, not a surplus. The excessive number of unfilled jobs this past year is dwindling quickly, but the recent pace would need to continue unabated another 9 to 12 months before we would conclude there was a surplus of workers signaling a recession. We have no doubt that the Fed would quickly add $100’s of billions to the banking system and make multiple rate cuts before unemployment rose too far and consumers started sitting on their wallets. This is not the 1970’s Dollar devaluation economy where the Fed lost control. Since the Great Financial Crisis of 2008, the Covid lockdown of 2020, and even the 2023 mini bank panic, the Fed has learned to move with hyper-speed. 

One of the most important metrics to market watchers that can foretell when the jobs market is in trouble is the Continuing Claims for Unemployment. Continued Claims often begin to rise sharply months prior to an official recession. Anything below 2.5 million has historically been an indication of a healthy jobs market. The current level of 1.79 million unemployment claims paints a picture of stability and opportunity. 

With a blend of economic resilience and speculative caution, the outlook remains nuanced. While a summer mega cap equity peak may herald a period of correction and recalibration into September to grow into elevated earnings multiples, the broader trajectory and liquidity hints at potential gains in both stocks and bonds. With the backdrop of an early innings AI buildout, the narrative of economic tides and financial prudence continues to unfold, inviting investors to navigate the waves with a blend of medium term vigilance and longer-term optimism.

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