An economic rule that has predicted every U.S. recession since 1970 was triggered last week with the disappointing July jobs report.
Following Monday’s opening, the Dow Jones Industrial Average fell more than 1,000 points, while the Nasdaq and S&P 500 also fell by 3.9 percent and 3.2 percent respectively, on recession fears, Fox Business reported.
The tech stock heavy Nasdaq also fell over 1,000 points for the first time since its inception in 1971.
🚨#BREAKING: Over $1.93 trillion has been wiped out from the US stock market so far today as the Nasdaq has dropped over 1,000 points. Officials say the Nasdaq has never been this low, not even intraday. pic.twitter.com/gCODgVGri9
— R A W S A L E R T S (@rawsalerts) August 5, 2024
The weak jobs report — only 114,000 new jobs were added in July versus the 175,000 anticipated, as unemployment ticked up from 4.1 percent to 4.3 percent — helped fuel the sell off.
“While Friday’s employment report was disappointing, it wasn’t the only worrisome economic indicator, only the latest,” Greg McBride, Bankrate’s chief financial analyst, told Fox Business.
“Couple economic concerns with the cacophony of earnings disappointments and weak corporate outlooks, global unrest, and currency gyrations, and you have the recipe for sudden volatility,” he explained.
With the latest jobs report, the “Sahm Rule” is in effect.
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The rule, named after former Federal Reserve economist Claudia Sahm, is an indicator of the onset of a recession and occurs when the three-month unemployment rate average increases by 0.5 percent or more compared to the lowest three-month average from the past year, according to the Federal Reserve Bank of St. Louis.
Fox Business highlighted that the unemployment rate average over the last three months is 4.13 percent, which is 0.63 percent higher than the twelve month low of 3.5 percent recorded in July 2023.
“That puts it up over its half-a-percentage-point threshold, noting that comes off of historical experience, that doesn’t necessarily tell us where we are right at this moment, saying a recession,” Sahm pointed out in a Bloomberg interview posted to YouTube on Friday.
“This has seen way too much momentum in the unemployment rate in recent months. I mean, 4.3 percent, right? … So whether we are at that moment of a recession or not, this is your build into substantial weakening in the labor market,” she noted.
However, Sahm went on to add, “All is not lost. The bottom is not falling out. We should never panic. There are policy tools, there are levers.”
“I don’t overread one data point, but this isn’t one data point. So I think the case now for, ‘Hey, we’re normalizing,’ — We did need to slow things down some, probably, generally speaking,” she continued. “But now the question is, ‘OK, so we’ve had enough slowing here. What levels this out?’”
Sahm concluded, “And that, I think — I don’t have the answer for that.”
Beyond the U.S. stock market, the cryptocurrency bitcoin fell 17.5 percent to $50,239 per coin, according to Fox Business.
Further, CNBC reported Japanese Nikkei 225 stock index fell a precipitous 12 percent on Monday, its worst day since the 1987 stock market crash.
Chicago Fed President Austan Goolsbee suggested on CNBC’s “Squawk Box” Monday that interest rates, raised to combat inflation, may be dampening the economy by being too “restrictive.”
“Everything is always on the table, whether that’s increases, cuts, etcetera, but the Fed’s job is very straightforward,” says Chicago Fed Pres. @Austan_Goolsbee when asked about an emergency rate cut. “The conditions come in, we’re going to respond as appropriate.” pic.twitter.com/ds0fhFLloO
— Squawk Box (@SquawkCNBC) August 5, 2024
If economic conditions continued to deteriorate the Fed central bank will take action to “fix it” he said, which likely would include lowering interest rates.
