Stocks have been on a downward trend this week, and the sell-off continued Friday after the release of July jobs numbers spooked investors.
According to the “Sahm rule,” which has accurately predicted every recession since 1970, the jobs reports may suggest a recession is on the way. The Dow Jones Industrial Average, S&P 500, and Nasdaq all experienced significant losses Friday.
Nasdaq, S&P 500, and Dow Declines
The Nasdaq composite fared worst, dropping 3 percent. The Nasdaq heavily represents the technology industry. The S&P 500 similarly fell 2.3 percent, and the Dow lost 2 percent, or nearly 800 points.
Outside of the stocks and index funds, the 10-year Treasury fell to 3.82 percent Friday in the bond market, the low for 2024. Prices for U.S. crude oil dropped to $73.60 per barrel.
Impact of July Jobs Report
Many of these substantial drops were due to a poor jobs report for July. According to the Department of Labor, non-farm payrolls rose by 114,000 jobs, much lower than the 180,000 anticipated. In private payrolls, the 97,000 jobs added significantly underperformed the expected forecast of 155,000, also lagging June’s job growth.
Unemployment Rate Increases
While job creation numbers were down, the unemployment rate increased to 4.3 percent, up from 4.1 percent, which the Fed expected. This data is a major contributor to investors’ recession fears, in part due to the warnings of the Sahm rule.
The Sahm Rule’s Role
The Sahm rule, named for economist Claudia Sahm, has been used to predict every recession since 1970. According to the rule, the economy is in a downturn if the unemployment rate is a half percentage point above its lowest point over the past 12 months.
Layoffs and Economic Cycles
The logic of the rule is based on the assumption that rising unemployment indicates layoffs. Increased layoffs result in reduced consumer spending, perpetuating the weakened business and layoff cycle that creates a recession.
Economists’ Perspective
Despite the figures triggering the Sahm rule, many economists claim that the rule does not apply because of the unusual conditions resulting from the Pandemic economy. While layoffs have increased to the highest point in over a year, they are historically low.
One theory is that companies were holding onto employees because jobs were complex to fill in recent years, and now companies are slowly letting go of the redundant workforce.
Federal Reserve’s Stance
Federal Reserve Chair Jerome Powell was also ultimately dismissive of the allusion to the Sahm rule this week, saying, “It’s not like an economic rule where it’s telling you something must happen. We think we’re seeing a normalizing labor market and observing to see if it turns out to be more.”
Claudia Sahm’s Input
Sahm also weighed in on the discussion, saying, “A recession is not imminent, even though the Sahm rule is close to triggering….the swing is from labor shortages caused by the pandemic to a burst in immigration is magnifying the increase in the unemployment rate.”
Economic Outlook
Sahm concluded, “A recession is not imminent, but the risks of a recession have risen.”
GDP Updates
While this indicator reveals potential economic problems, other recent updates to the gross domestic product (GDP) show that the U.S. economy remains relatively strong.
Investor Caution
While most economists are not overly concerned about the implications of the Sahm rule being triggered, investors are more cautious, leading to this week’s widespread market sell-off.
Concerns about Economic Soft Landing
Sarah House, an economist at Wells Fargo, said, “I think [the triggering of the Sahm rule] would raise some concerns about whether we can pull off a soft landing.” By soft landing, House refers to the Fed’s ability to decrease inflation by increasing interest rates without triggering a recession.
Impact on Amazon
One of the companies most impacted by the sell-off was Amazon, whose stock dropped by 12 percent. The company reported a positive profit but did not reach the sales forecast, resulting in heavy volume. It also forecast poor expectations for revenue in the third quarter. Amazon sales were their worst since April 29, 2022, when they fell 14.05 percent.
Apple’s Positive Performance
On the other hand, Apple has improved more than 2 percent in recent reports as it has earned more than expected. The boost was driven by iPad tablet sales, which increased by 24 percent to $7.2 billion.
