Analysts\u2019 favourite gauge of the U.S. economy\u2019s health comes from data. And at the moment, the numbers look OK \u2026 ish. Hiring is down, but unemployment hasn\u2019t spiked, inflation isn\u2019t ballooning (as feared) because of tariffs, and consumer spending is holding up remarkably well. <\/p>\n
Economist Claudia Sahm is an expert (if not the expert) on the conditions that presage a recession and how policymakers should react as a result. She is the creator of \u201cthe Sahm Rule,\u201d an employment indicator monitored by everyone from central banks to the global financial giants. The Sahm Rule says that a recession is likely when the three-month moving average of the\u00a0national unemployment rate\u00a0rises by 0.5 percentage points or more, relative to the minimum of the three-month averages from the previous year.<\/p>\n
Sahm\u2019s equation has proved invaluable. As JP Morgan observed<\/a>, it \u201cwas 100% accurate prior to the pandemic, dating back to 1959.\u201d <\/p>\n Therein lies the problem: During the pandemic, Sahm believes the tectonic plates of the economy began shifting and haven\u2019t settled since.<\/p>\n The labor market has behaved strangely since the pandemic. President Trump\u2019s anti-immigration drive has reduced the number of available workers. Employers have been reluctant to hire for new roles. Unemployment has ticked up but isn\u2019t out of control by historical standards. Hiring remains tight, in a \u201clow-hire, low-fire\u201d environment. <\/p>\n Secondly, America\u2019s institutions\u2014the courts, the central bank, its federal agencies\u2014have been politically swayed by the Trump Administration. Economists are no longer sure they act independently to provide the checks and balances that historically made the U.S. economy a transparent, and therefore trustworthy, place to do business.<\/p>\n The former Fed Section Chief who once served as Obama\u2019s senior economist doesn\u2019t think a blow-out event will crash the American economy. Rather, her fear is that aggregating events will reshape these two fundamental factors, and that the usual responses from policymakers are unlikely to be fit for purpose.<\/p>\n If a path can be charted, Sahm fears we\u2019re moving the wrong way down it.<\/p>\n Tectonic plate one: Labor<\/p>\n Many economists have been eyeing the \u201cknife-edge\u201d in the labor market<\/a>. They are watching the \u201cbreakeven number\u201d (the job creation figure needed to stop unemployment from climbing) grind lower and lower, offset by significant immigration, which has reduced labor supply.<\/p>\n Sahm isn\u2019t so concerned by the month-to-month shifts. Businesses are finding a steadier footing amid tariffs, according to the Fed\u2019s first Beige Book of the year<\/a>, meaning employers\u2019 low-fire, low-hire approach is no longer driven by fear. Sahm\u2019s concern is longer term: What it means for people looking for work but who can\u2019t find a job, and whether they\u2019ll be ignored by policymakers who are only alert for the technical numbers that signal a downturn. <\/p>\n \u201cI get concerned when I hear \u2018Well, we don\u2019t have layoffs, so we don\u2019t have a recession,’\u201d Sahm told Fortune in an exclusive interview. \u201cBut you do have a very low hiring rate. It might not be an aggregate event, it might not be a broad-based contraction like we see in a recession, but it certainly has real implications for workers coming into the labor market.\u201d<\/p>\n \u201cSomething\u2019s happening here,\u201d Sahm adds. \u201cIt\u2019s clearly bad for people looking for work, but we can\u2019t just have this, \u2018Oh, if we avoid a recession, all is good.\u2019\u00a0It could be that we\u2019re dealing with much more structural shifts, and those aren\u2019t just hard to forecast; they\u2019re hard to assess in the moment because those structural shifts can be very slow.\u201d<\/p>\n AI replacing roles is, of course, a factor. Fed Chairman Jerome Powell is monitoring the situation \u201cvery carefully.\u201d<\/a> JPMorgan\u2019s CEO Jamie Dimon said LLM-driven layoffs could lead to civil unrest<\/a>. Yet the hand-wringing over the impact of AI doesn\u2019t explain the depressed hiring rates we\u2019re seeing right now, Sahm said.<\/p>\n An optimist might suggest that a lower hiring rate is a shake-out from incredibly tight conditions during the pandemic. Between 2022 and early 2024, the Beveridge curve<\/a>\u2014usually a downward slope illustrating the relationship between job openings and the unemployment rate\u2014was more of a straight line: In theory, for every job opening there was a person in need of a role. Fewer openings at the moment may merely show that employers have found the talent they need, and don\u2019t want to add individuals who\u2014in a tight market\u2014can demand the pay and conditions they want, a phenomenon observed by ADP\u2019s chief economist Dr Nela Richardson.<\/a><\/p>\n The data also isn\u2019t illustrating an economy in need of fiscal stimulus to generate activity<\/a>\u2014though that\u2019s what it\u2019s getting this year anyway in the form of the One Big, Beautiful Bill Act. Analysts are also banking on interest rate cuts from a more dovish Fed chairman, but again Sahm feels this won\u2019t kickstart sluggish hiring: Sahm described the behavior as how a government might \u201ctraditionally\u201d stimulate a weakening economy, \u201ckind of [a] front-end recession response.\u201d<\/p>\n \u201cBut against the backdrop, as best we know from the data, business activity looks pretty OK, consumer activity looks OK. I\u2019m concerned that stimulating more demand isn\u2019t what\u2019s holding back hiring\u2014there\u2019s something else.\u201d<\/p>\n Sahm\u2019s own creation isn\u2019t demanding action: Currently, the recession indicator is sitting at a mild 0.35. She warned policymakers against relying too heavily on the tool in the current cycle, saying their attention should be focused\u2014\u201dmaybe even more so\u201d\u2014on the labor market because \u201cit doesn\u2019t hold the typical pattern, which means our typical tools to fight [it] like a recession may not be the right ones.\u201d\u00a0<\/p>\n Tectonic plate two: Institutions<\/p>\n For all the ingenuity and commitment it took to build America into the globe\u2019s preeminent economic force, the country would not retain the title if it weren\u2019t for the strength of its institutions<\/a>. President Trump witnessed the market blip when he threatened the independence of the Federal Reserve <\/a>with remarks about firing Chairman Powell, and Wall Street has been reinforcing the importance of an autonomous central bank ever since.<\/p>\n