It's OK to calm down about the economy. Yes, Friday's unemployment news was bad. Yes, the NASDAQ and Dow Jones neared correction territory on Friday morning. And yes, the Sahm Rule Recession Indicator has now been triggered. Odds are, though, a recession is not imminent. 

Here are three reasons why, in descending order of optimism. One, recent growth has been strong. Two, the economy has been near full employment for a while, and some kind of job growth slowdown is almost inevitable. Three, we're past the window where Federal Reserve actions can influence the election, though its recent behavior is still worrying.

Last week, the media's manic mood swing was on the exuberant side from news of a strong 2.8 percent gross domestic product (GDP) growth in the second quarter of 2024, which ended on June 30. This was a surprise improvement on the previous quarter's 1.4 percent growth. A normal reading is around 2 percent. Better, most of that growth was in the private sector, especially in consumer spending and inventory investment.

The current quarter's GDP growth estimate will come out on October 30. It would take a drastic swing to move from 2.8 percent to negative in just one quarter, though it has happened before. It typically takes two consecutive quarters of negative growth for the National Bureau of Economic Research to declare a recession, though its official standard is to call it as they see it.

The unemployment rate went up from 4.1 percent in June to 4.3 percent in July. June's reading snapped a 30-month streak of unemployment at or under 4 percent. This was the longest such streak since the 1960s.

For context, anything under 5 percent is considered pretty good. The eurozone's unemployment rate is currently 6 percent and often tops 10 percent, even in good times.

When an economy is essentially at full employment, a slowdown in job growth isn't necessarily cause for worry. The economy still has 8 million job openings, and the labor force still grew by 114,000 jobs. That annualizes to more than a million more jobs per year. 

That is slower than population growth, which isn't ideal. The labor force participation rate is also still below prepandemic levels. But a sane immigration policy combined with labor reforms like loosening occupational licensing requirements would fill more of those job openings while creating more opportunities for workers who are still outside the labor force.

The Federal Reserve's recent actions spark some worry. The Fed has spent the last two-and-a-half years walking back its panicked overreaction to COVID-19, which caused high inflation in the first place, along with a bipartisan deficit spending explosion. Inflation is finally slowing and getting back close to its 2 percent target, down from its 9.2 percent peak.

The trouble is that Fed Chairman Jerome Powell indicated that the Fed will stop focusing solely on inflation and will now pay attention to the labor market as well. The Fed has a dual mandate that tasks it with both keeping inflation low and keeping employment high. These can contradict each other, as Powell might soon find out.

If unemployment continues to worsen, look for the Fed to counteract that with stimulus in the form of interest rate cuts and monetary expansion. The tradeoff to this stimulus is higher inflation—exactly what the Fed has been fighting.

While an expected interest rate cut in September isn't a big deal by itself, if it's the start of a larger stimulus campaign, any short-term economic boost will come at the cost of a slowdown later.

The Fed's actions have lag times ranging from about six months to 18 months, so anything it does now will not impact the election. This is good news for the Fed's independence, but it does not inspire faith in Powell's commitment to fighting inflation. It would be better for the Fed to stay focused on inflation. Monetary policy is a poor tool for job creation. Entrepreneurs have a much better track record.

As usual, the big picture is a mix of short-term pessimism and long-term optimism. Whether or not the current recession doommongering comes true, the long-term trend of increasing superabundance will hold. That's as good a reason for calm as any.

The post Recession Is Not Inevitable, Despite Stock Market Slump appeared first on Reason.com.

The first domino: A bad U.S. economic outlook, reflected in Friday's jobs report, helped prompt major stock sell-offs globally over the weekend.

"Japanese stocks collapsed on Monday in their biggest single day rout since the 1987 Black Monday sell-offs," reports Reuters, with the Nikkei 225 index falling 12.4 percent and the Topix index falling 12.2 percent. The Kospi index in South Korea fell more than 10 percent. Equity markets felt the pain in Taiwan, Australia, Singapore, Hong Kong, and China, though to a lesser degree. "At one point, the plunge in Japanese and Korean stocks tripped a 'circuit breaker' mechanism that halts trading to allow markets to digest large fluctuations," reports The New York Times. "But even after those mandatory breathers, the sell-off in stocks seemed to accelerate. Jitters spread to the debt market, prompting a halt in trading in Japanese government bonds as well."

Wall Street's "fear gauge"—the VIX—jumped to its highest level since 2020, when the pandemic prompted a wild market fluctuation. "The market response is a reflection of the deteriorating U.S. economic outlook," Jesper Koll, a director at financial services firm Monex Group, told the Times. "It was a New York sneeze that forced Japanese pneumonia."

The U.S. jobs report, released Friday, found that hiring slowed significantly in July. Unemployment continued its slow creep upward—4.3 percent, the highest since October 2021—and wage growth eased a bit. The jobs report also revised the May and June numbers downward, by a combined 29,000 jobs, indicating that the July downshift did not come out of nowhere. It also "stoked fear of a coming recession" due to something known as the "Sahm Rule," named for economic Claudia Sahm, who identified in 2019 a useful recession indicator that our July jobs report has unfortunately met (more on that from Reason's Eric Boehm).

Inflation has showed plenty of signs of cooling a bit, responding to Federal Reserve rate hikes, but the jobs report means a rate cut "could be on the table" as soon as September, according to Fed Chair Jerome Powell.

In other words, the aspirational "soft landing"—a cooling down of inflation without triggering a recession—may not in fact be materializing. And these American warning signs are leading to global ripple effects.

Bloomberg's Joe Weisenthal has, I think, the smartest and most concise take on what's going on, for those who indulge:

10 THOUGHTS ON TODAY'S BIG MARKET SELOFF

In today's 5 Things newsletter, I jotted down a bunch of random stuff about this moment in stocks, crypto, FX, and macro.

Here they are

1) It was clear instantly on Wednesday that Powell was going to be offsides this market: pic.twitter.com/iJ6ipo7Grc

— Joe Weisenthal (@TheStalwart) August 5, 2024

Scenes from New York: Will Rudy Giuliani's real estate save him?

QUICK HITS

• The U.S. government believes Iran and Hezbollah will retaliate against Israel for the recent assassinations of Hamas leader Ismail Haniyeh in Tehran and Hezbollah leader Fuad Shukr in Beirut.
• Per tabloid reporting, which was partially confirmed by the campaign, Kamala Harris' husband, Doug Emhoff, had an affair during his first marriage (not to Harris). The woman he had an affair with allegedly became pregnant and did not keep the baby, though the campaign has not acknowledged or confirmed that part.
• "Belgium's Olympic committee announced Sunday that it would withdraw its team from the mixed relay triathlon at the Paris Olympics after one of its competitors who swam in the Seine River fell ill," reports the Associated Press. "After a spring with an abnormal amount of rainfall, tests of the river's water found that the levels of E. coli bacteria were more than 20 times higher than what World Triathlon considers acceptable," wrote Reason's Natalie Dowzicky last week. "But the mayor of Paris, Anne Hidalgo, still jumped into the Seine earlier this month in an effort to instill confidence that the waterway was just fine. But a small dip is very different from submerging yourself for hours of racing."

This is the most French possible thing that could have happened when Paris hosted the Olympics:

Running with a really stupid idea because it sounds cool, then somehow ending up fucking over the Belgians. https://t.co/K6Id4CUVV5

— Tom (@Lawmadillo) August 5, 2024

• Fun fact:

Nirvana's Nevermind was released 12,000 days ago. Its release date is closer chronologically to Fidel Castro taking control of Cuba than to today.

— Dan Szymborski (@DSzymborski) August 1, 2024

The post Markets in Panic appeared first on Reason.com.

A bummer of a jobs report released Friday morning triggered a sharp drop in the stock market and stoked fear of a coming recession—thanks to something known as the "Sahm Rule."

So what is that?

It is named after economist Claudia Sahm, who served as a top economic advisor during the Obama administration and identified a historical indicator of coming recessions in 2019: every time since 1970 that the three-month moving average of the U.S. unemployment rate is more than half a percentage point above the lowest three-month moving average from the previous year, a recession has soon followed.

That's a bit complicated, admittedly. If you want to know what it looks like in practice, check out today's jobs report. Unemployment in July ticked upwards to 4.3 percent. Over the past three months, the average unemployment rate has been 4.13 percent. That's quite a bit higher than the lowest three-month average from the past year—which was 3.63 percent, between June and August 2023.

Thus, the Sahm Rule has been triggered.

But the "rule" is also a set of guidelines. In the 2019 paper where Sahm identified this historical early warning system for a coming recession, she called for governments to begin distributing stimulus payments as soon as this alert was triggered. Doing so, she argued, would allow for a speedier response to a recession by eliminating the lag that occurs while politicians and other observers debate whether a recession is coming and what to do about it. Essentially, it is meant to be a technocratic solution to a recurring problem.

The political system has not adopted that approach—and thank goodness, because the federal government is $35 trillion in debt and already on pace to run a $2 trillion deficit this year. There's literally no money for stimulus checks right now.

The markets, however, seem to be taking the Sahm Rule seriously. There was a huge sell-off on the stock market Friday morning and bond yields fell as well—an indication that investors are essentially "pricing in" the cost of a coming downturn.

But there's one more complicating factor. Sahm herself says this might be a false alarm.

The Wall Street Journal reports that "Sahm doesn't think the economy is on the immediate cusp of a recession. She reckons that changes in the supply of labor since the pandemic, including the recent jump in immigration, have led the Sahm rule to overstate how weak the job market is."

"We are still in a good place, but until we see signs of stabilizing, of leveling out, I'm worried," Sahm, who also worked at the Federal Reserve and is now the chief economist at New Century Advisors, an investment firm, told the Journal.

It's good to be cautious about the predictive power of historical trends. Indeed, in that 2019 paper, Sahm warned that "the Sahm rule is an empirical regularity. It's not a proposition; it's not a law of nature."

Federal Reserve Chairman Jerome Powell echoed that sentiment this week. He called the Sahm Rule "a statistical regularity" on Wednesday, adding that "it's not like an economic rule, where it's telling you something must happen." At a meeting earlier this week, the Federal Reserve decided to hold interest rates steady, though it indicated that a rate cut could be coming in September.

So are we heading for a recession or not? As always, it's impossible to know until we're already in one. The commonly used definition of a recession is back-to-back quarters of negative economic growth—but the economy grew by 2.8 percent during the second quarter of 2024. By that metric, it would take until the end of the year for the country to be in a recession.

The official arbiter of recessions is the National Bureau of Economic Research (NBER), a private entity whose definition of a recession takes into account monthly indicators like employment, personal income, and industrial production along with quarterly gross domestic product (GDP) growth (by their terms, two consecutive quarters of negative GDP growth often, but not always, correspond with an official recession).

Still, the outlook is certainly darker after Friday's jobs report. If a recession is coming, the federal government's and Federal Reserve's ability to respond will be severely limited by the poor fiscal and monetary decisions that have left the Treasury deeply in debt and the central bank's balance sheets overstretched.

The Sahm Rule has correctly predicted every recession in the past half-century. Let's hope it got this one wrong.

The post What's the Sahm Rule? Alarming Jobs Report Raises Recession Risk. appeared first on Reason.com.