Amidst the economic noise of 2024, the Sahm Rule looms large over financial forecasts. Developed by economist Claudia Sahm, this rule has become a reliable measure of recession onset. It’s deceptively simple—when the three-month moving average of unemployment rises by 0.5 percentage points above its 12-month low, the economy is likely heading into a recession (Sahm, 2019). The August 2024 unemployment rate sat at 4.2%, just a hair’s breadth away from the 4.3% threshold that would trigger the Sahm Rule (Bureau of Labor Statistics [BLS], 2024). Given that past recessions in 2001 and similar labor market shifts preceded 2008, it’s difficult to ignore the warning signs (Sahm, 2019).
But this isn’t just about a percentage point. Rising unemployment signals deeper structural issues, and while the August numbers didn’t breach the Sahm Rule threshold, the trend is unmistakable. With layoffs increasing across key sectors, we’re witnessing an early unraveling that’s eerily similar to past economic downturns (Challenger, Gray & Christmas, 2024). Unemployment doesn’t rise in a vacuum—it’s often the first indicator of faltering consumer confidence, slowing business investment, and tightening credit conditions (Blanchard, 2019).
What’s worrying is how quickly layoffs are accelerating. According to Challenger, Gray & Christmas (2024), layoffs jumped by 193% in August 2024, particularly in the tech and manufacturing sectors. These are industries that serve as economic bellwethers; when they contract, it’s a signal that the broader economy is faltering. And yet, these layoffs haven’t fully reflected in the unemployment rate—something that should give policymakers pause. It’s a sign that the storm is still gathering strength, but will soon break.
Yield Curve Inversion and Normalization
The yield curve perhaps stands as one of the most reliable economic indicators, but individuals can easily misunderstand its signals. The U.S. yield curve has been inverted for over a year, with short-term interest rates surpassing long-term rates. Historically, an inverted yield curve precedes recessions, as it did before the dot-com crash of 2001 and the global financial crisis of 2008 (Estrella & Mishkin, 1996). This is because an inversion typically shows that investors are losing confidence in the short-term prospects of the economy, moving their money into safer long-term assets.
In 2024, the yield curve finally normalized—meaning short-term rates fell below long-term ones again (Economic Research, Federal Reserve Bank of St. Louis, 2023). On the surface, this might seem like good news, a sign that the economy is stabilizing. But history tells us otherwise. Yield curve normalization often happens just before a recession strikes, signaling that the economy is transitioning from a period of turbulence into a more pronounced downturn (Rudebusch & Williams, 2008). It’s the calm before the storm.
The reason this matters is simple: normalization is often the last gasp before economic conditions worsen. Investors who moved their capital into long-term bonds during the inversion aren’t doing so out of optimism; they’re bracing for impact. In the lead-up to the 2007-2008 financial crisis, the yield curve also normalized after a long period of inversion—and shortly after, the recession hit with full force (Estrella & Trubin, 2006). The parallels to today are striking.
While some economists argue that this time is different, the fundamentals remain the same. Inflation continues to gnaw at purchasing power, consumer debt is rising, and business investment is slowing. These are the exact conditions in which yield curve normalization signals trouble ahead, not relief (Federal Reserve History, 2023).
Rising Layoffs and Job Market Strain
People often view layoffs as the canary in the coal mine, indicating economic downturns that have not yet been reflected in the broader employment figures. In August 2024, layoffs surged, with a 193% increase compared to earlier months, according to Challenger, Gray & Christmas (2024). And these were not isolated incidents—major industries like technology, which had been driving growth, are now facing a rapid decline in employment. Manufacturing, another key sector, is also facing significant layoffs (Challenger, Gray & Christmas, 2024).
This trend mirrors what we’ve seen in previous recessions. In the months before the 2008 financial crisis, layoffs crept upward in key industries, even as the overall unemployment rate remained stable (Blanchard, 2019). The recognition of these early indicators as a clear signal that the economy was on the brink of collapse didn’t happen until the financial crisis hit. The fact that we’re seeing similar patterns in 2024 should raise alarm bells for policymakers and business leaders alike.
What’s even more concerning is the lag between layoffs and their impact on the unemployment rate. Many of the layoffs in August haven’t yet shown up in the unemployment figures, meaning the true scale of job losses is likely being under-reported (BLS, 2024). Once these numbers catch up, we could see a sharp spike in the unemployment rate—potentially triggering the Sahm Rule and cementing the likelihood of a recession.
For businesses, this is a crucial moment. Layoffs may seem like a short-term solution to protect profitability, but they also signal deeper weaknesses in the economy. Reduced consumer spending, higher debt burdens, and slowing business investment are all contributing to the strain (Challenger, Gray & Christmas, 2024). The question isn’t whether these layoffs are a sign of trouble—they are. The real question is how much longer businesses and consumers can hold out before the full weight of economic contraction hits.
Wage Growth and Inflation
Inflation is the economic story that won’t go away. Despite the Federal Reserve’s aggressive rate hikes over the past two years, inflation remains stubbornly high, eroding consumer purchasing power and squeezing household budgets (Blanchard, 2019). In August 2024, wage growth clocked in at 3.8% year over year (BLS, 2024). On the surface, that might seem like good news—wages are rising, right? But when you factor in inflation, real wage growth is stagnant.
Flat wages combined with rising prices are a recipe for disaster. As consumer purchasing power weakens, spending slows. This creates a ripple effect throughout the economy, impacting everything from retail sales to housing demand (BLS, 2024). And we’ve seen this movie before—during the 1970s, when wage stagnation and inflation led to a prolonged period of economic stagnation, now known as stagflation (Blanchard, 2019).
For workers, stagnant real wages mean that they’re effectively earning less, even if their paychecks are nominally larger (BLS, 2024). For businesses, this creates a challenging environment. Consumers become less willing to spend, and companies are forced to raise prices to cover their rising costs, further perpetuating the inflationary spiral (Federal Reserve Board, 2024). It’s a vicious cycle, one that’s difficult to break without significant economic intervention.
The Federal Reserve’s Role and Future Projections
The Federal Reserve finds itself in a precarious position. On one hand, it has committed to fighting inflation, raising interest rates aggressively over the past two years (Federal Reserve Board, 2024). On the other hand, rising unemployment and slowing economic growth are putting pressure on the Fed to pivot—perhaps even cutting rates to stimulate the economy.
This balancing act isn’t new. In the early 1980s, the Fed faced a similar dilemma. Inflation was rampant, but so was unemployment. The Fed ultimately chose to prioritize fighting inflation, raising rates to levels that caused a recession but eventually brought inflation under control (Taylor, 1993). Today’s Fed may face a similar choice. If unemployment continues to rise and the Sahm Rule is triggered, the pressure to cut rates will grow (Federal Reserve Board, 2024).
But cutting rates isn’t without risks. Lower rates could reignite inflation, putting the economy right back where it started (Federal Reserve Board, 2024). It’s a delicate dance, and one that will probably define the economic narrative for the rest of 2024 and beyond.
Conclusion
The U.S. economy in 2024 is walking a tightrope. On one side, we have the lingering threat of inflation, eroding wages, and stifling consumer spending (Blanchard, 2019). On the other, rising layoffs, a normalizing yield curve, and the looming specter of the Sahm Rule point toward an impending recession (Sahm, 2019). While the official data may not yet declare a recession, the writing is on the wall. Businesses, policymakers, and consumers alike need to prepare for the storm that’s brewing.
As history has shown us repeatedly, these economic warning signs rarely appear without consequence. The time to act is now—before the full weight of the downturn arrives.
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