Federal Reserve Governor Lisa Cook spoke today and stressed that unemployment is at a low level.
Objectively, this is true:
Unemployment rate in the United States
But I want to highlight the far right side of the chart because of the arrow rule. It is named after economist Claudia Sahm and is an economic indicator aimed at identifying recessions sooner. The rule states that a recession is likely to occur if the three-month moving average of the national unemployment rate rises by at least 0.5 percentage point above its lowest point in the previous 12 months.
The lowest point in the last 12 months was in July 2023 at 3.5% and it is currently at 4.0% (although the three-month average is still at 3.9%).
Historically, this is the tipping point when job losses accelerate, as shown in this Bank of America chart:
The arrow rule has successfully marked the beginning of every US recession since the 1970s in time. For example, the report pinpointed recessions that began in 1974, 1980, 1981, 1990, 2001, and 2007-2009.
In Europe and Canada, researchers looked at the arrow rule and found that it needed to be amended, suggesting that it was more of a guide than a law. The UK and Canada have already violated these rules, so if it’s coming to the US, it will come there sooner.
What I think is important here is the principle: as soon as there is a material rise (0.5-0.7 percentage points) in the unemployment rate (ignoring the noise), a snowball effect occurs. I think this effect is particularly large when policymakers are unresponsive and unlikely to cut interest rates quickly enough.
