Last Friday, the U.S. Department of Labor released an employment report showing that U.S. employment growth slowed more than expected in July and the unemployment rate rose to the highest level in nearly three years, reaching 4.3% (market estimate of 4.1%). Then "Sam's Law" was triggered, and U.S. stocks fell off a cliff, causing the market to fall into a panic of "U.S. economic recession." What exactly are Sam's rules? If Sam's rule is triggered, what impact will it have on the market?

The concept of Sam's Rules

Sam's rule means that when the three-month moving average of the U.S. unemployment rate rises by 0.5 percentage point or more from the low of the past twelve months, it means that the United States has entered the early stages of a recession. This indicator captures a significant slowdown in economic activity by looking at a sharp rise in the unemployment rate.

Sam's rule is essentially an arithmetic adjustment of the unemployment rate. In fact, an economic recession will inevitably lead to an increase in the unemployment rate, and an increase in the unemployment rate is one of the responses to the economic recession. The unemployment rate is a lagging indicator of economic data. The Sam Rule is a simple and effective early warning tool for economic recession. By monitoring changes in the unemployment rate, it can provide warnings for significant slowdowns in economic activity, allowing policymakers and businesses to take action for a possible economic downturn.

Claudia Sahm, the "Proponent of Sahm's Rule", pointed out that Sahm's Rule only plays a supporting role in the study. The idea is that when we are in an economic recession, get the government to commit to well-designed and effective fiscal policies and get them to commit to Activate immediately when macroeconomic conditions require it.

US economy not in recession despite triggering Sam's Rule?

Claudia Sahm said: "In my opinion, even though the Sahm rule now shows that the U.S. economy is in recession, I don't think the U.S. economy is in recession. It is malfunctioning and I think it still tells us something, but something like Our best-known recession indicator is two consecutive quarters of declining real GDP, which is called a technical recession."

Claudia Sahm believes that there are two basic reasons for the rise in unemployment. One is the weakening demand for workers. . Another reason for the increase in unemployment is the increase in labor supply, which will push the unemployment rate higher. What's even worse now for Sam's Rule indicators is that early in the pandemic, millions of workers dropped out of the labor market and simply left. Then, because they didn't come back as quickly as customers, there was a labor shortage and the unemployment rate was pushed down because there weren't enough workers. Social migration has surged in recent years and the labor market is recovering. But in the meantime, they are still looking for work, and the pace of job creation has slowed, causing unemployment to rise.

The SAM Rule is designed to allow the government to act quickly when the economy needs it

In any case, Sam's rule reflects a basic economic process: that labor market deterioration tends to be self-reinforcing. When the threshold of Sam's rule is breached, the unemployment rate always rises very high. The smallest increase from trough to peak is close to 2 percentage points. In that case, what should the Fed do?

New York Fed President Dudley believes that the longer the Fed delays cutting interest rates, the greater the damage it may cause. The neutral interest rate level expected by Fed policymakers is between 2.4% and 3.8%, which means that the current effective federal funds rate of 5.3% is still far from the neutral level. Once the United States does fall into recession, the Fed will need to lower interest rates to 3% or lower. Of course, it is possible for the Fed to cut interest rates immediately, but the possibility is very small. That would not be in line with Powell's cautious attitude. The Fed rarely takes emergency action outside of regular policy meetings unless the United States encounters a serious shock that changes the economic outlook or threatens financial stability.

From this, Dudley speculated that the Federal Reserve may decide to cut interest rates by 25 or 50 basis points at the September monetary policy meeting, depending on the economic data between now and then. The path for interest rates after September is unclear, but could be a series of gradual 25 basis point interest rate cuts that ultimately bring the policy rate below 4%, or if the Sam Rule predictions are accurate, the Fed will cut interest rates significantly.

Follow us

Find us on Twitter, Instagram, YouTube, and TikTok for frequent updates on all things investing.

Have a financial topic you would like to discuss? Head over to the uSMART Community to share your thoughts and insights about the market! Click the picture below to download and explore uSMART app！

Important Notice and Disclaimer:

We have based this article on our internal research and information available to the public from sources we believe to be reliable. While we have taken all reasonable care in preparing this article, we do not represent the information contained in this article is accurate or complete and we accept no responsibility for errors of fact or for any opinion expressed in this article. Opinions, projections and estimates reflect our assessments as of the article date and are subject to change. We have no obligation to notify you or anyone of any such change. You must make your own independent judgment with respect to any matter contained in this article. Neither we or our respective directors, officers or employees will be responsible for any losses or damages which any person may suffer or incur as a result of relying upon anything stated or omitted from this article.

This document should not be construed in any jurisdiction as constituting an offer, solicitation, recommendation, inducement, endorsement, opinion, or guarantee to purchase, sell, or trade any securities, financial products, or instruments or to engage in any investment or any transaction of any kind, nor is there any intention to solicit or invite the purchase or sale of any securities.

The value of these securities and the income from them may fall or rise. Your investment is subject to investment risk, including loss of income and capital invested. Past performance figures as well as any projection or forecast used in this article is not indicative of its future performance.

This advertisement has not been reviewed by the Monetary Authority of Singapore