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U.S. Unemployment Is No Longer Improving. Here’s Why That Matters

Most definitions of U.S. unemployment moved up in October. This may signal a weakening jobs market. On recent data, the U.S. unemployment rate is broadly flat and no longer declining.

If unemployment moves up again in November, then we could see a trend of a deteriorating jobs market. That could bring a much-heralded recession, and difficult decisions for the U.S. Federal Reserve (Fed).

The Sahm Indicator

One popular indicator of a coming recession is the Sahm indicator, named after economist Claudia Sahm. This happens when the 3-month average of unemployment, which is currently 3.6%, rises by more than 0.5% above the 12-month unemployment low, which is currently 3.5%.

Watching for 4% Unemployment

So the job market is not signaling a recession yet, but it’s hard to argue on recent monthly data that the unemployment rate is falling anymore. The key number to watch for is 4% unemployment. That would not be good news, but we’re not there yet.

As recently as March of this year, unemployment was on a clear downward trend. Since then it’s been a trickier call. Basically, unemployment has been bouncing around 3.6% since spring 2022. If unemployment hits around 4%, then the Sahm indicator will suggest a recession is coming, joining a host of other indicators — including the yield curve and a faltering housing market — that have pointed to one arriving or already being here.

False Start?

The unemployment rate has been bouncing around 3.5% to 3.7% for several months. A spike in August unemployment looked much like the October data does. We saw a spike in unemployment, but it reversed a month later.

October could be the same. If so, and unemployment improved in the December report, that would be good news. But still, in recent months, it’s become clear that the unemployment rate is no longer declining. The jobs market has moved from improving to being a little more neutral.

Optimists would point to 261,000 jobs added this October in the U.S. economy. We saw that in sectors such as tech, professional services and health care. On the other hand, the unemployment rate has moved up, too, and job growth in transportation, finance and many other sectors was broadly flat.

November’s Jobs Report

On Friday, December 2 at 8:30 a.m. ET, we’ll receive November’s Employment Situation Report. That will help inform whether the move up in unemployment seen in the October report is noise or part of a more concerning trend.

The Fed

If the jobs market does weaken, it will make the Fed’s role trickier. So far, the Fed has been able to fight inflation with higher rates, without too much concern for the jobs market. That’s because unemployment has recently been at historically low levels not previously seen since around the 1960s. If anything, the Fed worries that the jobs market is running too hot currently, though that’s arguably a good problem to have while it lasts.

If the job market were to worsen, the Fed’s decisions in December and beyond on interest rates become more complex. Then the Fed would have to balance risk of a recession against its inflation fight.

Inflation calls for higher rates; a recession suggests rate cuts may be needed. The Fed has signaled that the clear priority is bringing inflation down, but in the midst of a recession, its resolve could weaken. The Fed’s mandate is to manage both the jobs market and the inflation rate.

What Next?

With October’s jobs report, the November jobs data that will be reported on December 2 becomes more significant. If unemployment rises again, it could be a signal that a U.S. recession is getting closer.