The economy looks great now, but a seemingly trivial rise in unemployment contains a warning sign.
Follow this authorHeather Long's opinions
FollowBut it’s important to understand that the economy typically looks fine until a crisis hits. The very fact that the economy is in a good place now is reason to take the warning signs seriously — and act to prevent further deterioration.
“We are in the yellow flag category,” Sahm told me. “We should be having a recession risk discussion. It has crossed that threshold.”
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Sahm is adamant that the key takeaway from where her rule is now, along with other indicators that the economy is starting to slow — such as rising credit card debt and shoppers spending less — is that the Federal Reserve should cut interest rates. She doesn’t expect the Fed to lower the nearly 5.5 percent rate at its upcoming July 30-31 meeting, but she hopes Fed board members have a serious discussion about a September cut.
“By the time it is blatantly obvious we are in a recession, it’s too late for the Fed’s tools to work,” said Sahm, who is now chief economist at New Century Advisors and founder of Sahm Consulting.
Fed leaders keep arguing that it’s better to be done with inflation once and for all, even if they overdo things by keeping rates too high for too long and trigger a recession. It will be interesting to listen to Fed Chair Jerome H. Powell when he testifies before Congress this week. A month ago, he called the job market “strong.” Will he downgrade that to “solid”? And will he start to emphasize the risks of a downturn if the Fed is too stubborn to alter its course?
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Perhaps the toughest question is whether the Sahm Rule might be wrong this time due to the immigration surge in recent years. Business leaders and economists are quick to point out that immigrants have helped the economy excel lately. They........