Recession“Yellow Flags” Emerge as Unemployment Metric Rises

Dave:
An unemployment related recession indicator called the Sam Rule just started flashing a yellow warning here in the us. So what is this rule and how is it measured? How likely is it that the Fed reacts to this yellow warning? And how much should investors be paying attention? Today we’re going to dig into the state of the labor market. Hey everyone, it’s Dave and welcome to On the Market. Today we’re talking to Heather Long, she’s a calmness at the Washington Post, and she writes about the economy and labor market specifically. And in today’s episode, we’re going to ask Heather about how trends in the current labor market may be indicating a coming recession. We’ll also talk about the downstream impacts of unemployment upticks on the housing market in general, and if all this new data may lead to a Fed decision to lower interest rates sooner rather than later. Alright, let’s bring on Heather.

Heather:
Heather,

Dave:
Welcome to the show. Thank you for joining us.

Heather:
It’s great to be here. Thanks for having me.

Dave:
We’re here to talk about the labor market, which is really confusing through so many different metrics, so many different trends to keep an eye on. So maybe you could just help us with some context and give us an overall rundown of the most important data sets and trends that we’re seeing today.

Heather:
Sure. Overall, it’s a pretty darn good time still to find a job, to get a raise and to hopefully get on a career track. If you look back at the past few years, it’s been really crazy for job seekers and for workers. Obviously many people lost their jobs during the pandemic. Then we had the great resignation trend or what I like to call great reassessment of work. A lot of people were able to switch careers and switch jobs and get a pay raise in the meantime. And what we’re seeing now, what we’ve sort of seen for the past two years is really low unemployment. So unemployment below 4% in the United States is historically incredibly good, and we’ve seen that for over two years. It just ticked up a little bit in the last few weeks. I’m sure we’ll talk about that some more. But we basically had 27 months of unemployment rate below 4%.
We saw in the past year record low unemployment for a lot of workers of color, including black Americans, Hispanic Americans. So these are good trends, positive trends. It means almost everyone in America was benefiting. We’ve also seen really high job openings. Obviously as the economy was reopening from the pandemic, a lot of companies were really struggling to find workers. It was a race to find workers and they were offering a lot of perks. The work from home trends, flexible schedules. I’ve even been to manufacturing factories where people were for the first time ever offering the ability to work four or six hours on an evening shift instead of a full eight hour or nine hour shift. So there was just a huge amount of change in the labor market. The other big statistic that I keep a close eye on is just wages. Obviously at the end of the day, everybody wants a good job, not just a job paying $15 an hour.
We have record numbers of Americans who have been able to move up in the pay scale. So from a $15 an hour job to a 20 or $25 an hour job. And that’s a huge change in lifestyle. And our latest indicators show that while wage growth is slowing down a little bit, the latest readings are still around 3.9% on average. So not everybody gets that. It wasn’t quite that good for me, but 3.9% in the past year, which does put us above inflation of about 3%. So people have for the past, over the past year have been seeing wages rise faster than inflation.

Dave:
That’s a very important point. I just want to emphasize before we dig into some of what you just shared, Heather, is that wage growth has been up for a while now, but what is known as real wages, which is when you adjust how much salaries are going up to inflation during the pandemic, or at least in 2022 and some of 2023, it was negative, meaning that even though if you saw your paycheck going up, your actual spending power when you factor in inflation was declining. That has fortunately shifted. And for the last year or so, we have been starting to see real wage growth, inflation adjusted wage growth start to go up. So Heather, it does seem, when you look at all these data points, you pointed to many of the most important ones that there is strength in the labor market. In my world where I look at a lot of data, people frequently criticize different labor data sets because none of them is really perfect. And I think I’d like to just spend a minute on the unemployment rate at 4.1%. Could you tell us exactly what that’s measuring? Because sometimes I hear that yeah, that’s low because fewer people are in the labor force or people have multiple jobs. So can you just tell us exactly what it’s measuring?

Heather:
Yeah, it’s a good question. There’s a lot of confusion around this. I often hear from people as well who say I’m no longer counted because I fell off my unemployment benefits. So there’s a lot of misnomers. In order to be considered unemployed by the government statistics, you have to have actively searched for a job in the past month. And so they do have a survey where they’re asking tens of thousands of Americans every month, are you employed or not? So if you don’t have a job, okay, then you might fall in the unemployed basket. But the next question which you have to answer in order to be considered officially unemployed is have you actively search for a job? Meaning, so how are you sending out your resumes endlessly online? Are you actually walking into a target or somewhere and trying to apply for jobs? So that’s the official unemployment count and they divide that number of people who are actively searching for a job by all the people in the labor force. So labor force includes everyone who has a job, whether one job, two job or three jobs, plus all the people who are looking actively for work right now. So that’s that number when we’re talking about is it 4% or 4.1 or 3.5 or 10% is literally how many people are actively looking for work that don’t have it divided by all the people who either have jobs and are in the labor force.

Dave:
Thank you for explaining that. I just want to make sure that everyone who’s listening, if you really want to get nerdy with it and truly understand everything, you have to go deeper than the unemployment rate as Heather just showed. It is a useful metric. It tells us one thing about the labor market, but if you really want to understand anything, you can look at things like the labor force participation rate or you can look at the number of new unemployment claims, people who were recently lost their job, there’s continuing unemployment claims that helps measure longstanding unemployment. So there’s a lot of different things that you can look at, but as we’ve sort of been talking about, the holistic job picture is actually pretty good for in the us We do have to take a quick break, but stick with us more from Heather Long from the Washington Post when we’re back.
Welcome back to On the Market podcast. We’re here with Heather Long talking about the labor market and its impacts on the housing market. Let’s jump right back in now, Heather, I wanted to ask you, are there certain sectors or industries in the labor market that are doing particularly well or particularly poorly? Because a lot of my career has been spent in the tech industry and from what I hear, it’s kind of rough out there in the labor market. Is it just isolated to tech or are there other areas that are seeing sort of variants from the national trend?

Heather:
Yeah, it’s a good question. Some people refer to what we’re experiencing right now as a little bit of a white collar recession. That’s probably too strong of a word, but you’re right, it’s definitely a lot less hiring going on in the tech sector. My sector of media and in a lot of kind traditional white collar jobs, basically what happened last year, 2023 was a great year for a lot of these professions in 22 and 2023, and then we’ve seen a reversal. So the past 12 months, most of the job growth has been coming from the healthcare sector and from government. And most people are like government, should we really be counting those? But look, government, it’s really been local government and local government includes your teachers at your schools and police officers and your firefighters, the people who process your taxes. You can love or hate that they’re there, but you do need a lot of people to just do these basic services.
And so it’s not a bad thing to see a lot of the job growth finally coming in those areas. But we have seen a shift and I think you’re right. That’s why a lot of people, I get these phone calls too, like, Hey, I’m having a hard time finding a job right now because we did see so much hiring in 20 21, 20 22, 20, 23 in places like the tech sector or the finance sector, real estate sector, retail and hospitality was really bouncing back. And now we’ve seen the shift to healthcare and government jobs really leading the way for most of this year so far. So it’s not that people are necessarily getting fired, we’re not really seeing job loss in a grand scale overall in the tech sector or these white collar jobs, but we’re not seeing hiring right now. And so that’s the change that has really occurred and there’s just not hiring going on in those sectors.

Dave:
People listening to this podcast, real estate investors, people involved in real estate, we care about the labor market for a lot of reasons. Of course, for those of us who work full-time, we care about our job prospects. But one of the other reasons I at least look at this stuff is because it’s usually closely tied to recession indicators and fears or positivity about the broader economy. And Heather, you recently wrote about something called the SAM rule, which I had never heard about before, but it’s a recession indicator tied to the labor market. Can you tell us about it?

Heather:
Yeah, this is arguably one of our best recession indicators. And the reason why is just sort of what you were alluding to, the basics of this rule are they use the three month average of the unemployment rate and they compare that three month average to the lowest point, the lowest three month average in the past 12 months. And if the difference between the current three month unemployment rate average and the averages over the past 12 months is greater than half a percentage point. So basically unemployment rate has been moving up quite a bit. And recently then that has always since World War II indicated that a recession has started. So at the moment you can actually, the wonderful database Fred, which I’m sure a lot of your listeners are

Dave:
Very, we talk about it all the time. Yes,

Heather:
You can actually type in som, it’s named after Claudia Samm, SAHM Som rule, and it calculates this automatically so you don’t have to run your own code. And the latest reading is 0.43. So we’re not at the 0.5, we’re in a recession indicator, but we are really close. And we actually started the year back in January, February, we only had 0.2. So it’s really moved up a lot and that’s why I and a couple of other people who really watched the labor market closely were raising this red flag when that most recent jobs report came out beginning of the month. Like, wait a minute. Yes. Overall, like you and I started this conversation, the job market looks really good, people are employed, there’s a lot of jobs, but clearly the unemployment rate has been moving slowly higher for the past six to nine months. And I can tell you a lot of stories about why that unemployment rate’s moving up and we shouldn’t be concerned, but there’s been a clear trend here that can’t be ignored.
And I even called Claudia Sam who created that rule from when she was at the Federal Reserve, and she said the same thing I did. She literally said to me, yeah, we’re in a yellow flag situation. We’re not in a recession yet, but we’re clearly getting closer to that tipping point. And I immediately had a couple of readers who wrote in, they were like, you are just alarmist. Why are you doing this? And I said, look, you have to understand if you watch the data closely, anytime you see a small change in people losing their job or struggling to find jobs that can start to cascade really quickly, think about it. It makes logical sense. A couple people in a community lose their job, they pull back on spending, they’re not going to restaurants as much or the chunky cheese or wherever, and that means more people will start to lose their job.
I mean, that’s how you can go from these seemingly small changes in the unemployment rate to boom, suddenly six months to 12 months later you’re in a recession. So the good news right now is we can change this. If the Federal Reserve would actually start cutting the interest rates, relieving a little pressure on the economy, we can probably stop this cascading effect or at least slow it down a lot right now. So I was very glad to see the Fed chair Powell start to really change his tune this month and acknowledge that there’s been a real change in the labor market.

Dave:
I’m really glad you brought up the psychological element of this because it is true. So much of economics is just about how people respond and when you start to see job losses, people tighten up, they spend less money. So that part definitely of the SOM role makes sense to me. But even just from a pure math perspective, it also makes sense because when we talk about a recession, the most traditional way of measuring it, this is not actually how the government does it, but the rule of thumb that most believe is two consecutive quarters of negative GDP growth. So just gross domestic product, which is a measure of the total output of the US economy declines for two consecutive quarter. Well, what is GDP Gross domestic product? It’s just basically the number of people who are working multiplied times their average output. And so when you have less people working, which is signified by the higher unemployment rate, it is very likely that you’re going to see a decline in GDP and that could indicate that we are in a recession. So I had never heard of the so rule, but it makes perfect sense to me that this would be a pretty reliable recession indicator.

Heather:
Also not in isolation. So a couple people who when they wrote or tweeted at me or whatever, and they were like, you’re just alarmist. I was like, look, if this is the only thing that was flashing yellow, then yeah, I probably would be alarmist. But it’s not the only thing. We’ve seen a really big jump in long-term unemployed. So people who have lost their job within the past year and not been able with a year of searching to find new employment, some of those are tech worker types because things have really become a lot harder. And so we’ve got over 800,000 more people and long-term unemployed than we do a year ago. Another one that’s often considered that canary in the coal mine is temporary help service. So when the economy’s growing, you need workers fast. A lot of people hire temp workers for almost 18 months now.
We have seen temporary jobs decline, so that’s another one of those. Again, you’re not going to panic, but when you start to see a bunch of these things line up together, unemployment rate going up, temporary help, cut, cut, cut, cut, cut, and you see clearly harder to find a job after you’ve lost your job with more people who are long-term unemployed, that starts to tell a story that can’t be ignored. I’m not ready to totally panic, but I think there’s definitely a change, a transition going on right now and we don’t want it to get a lot worse.

Dave:
Can you tell us a little bit about how the SAM indicator is influenced by policy decisions and socioeconomic factors like immigration?

Heather:
So for people who are looking at the SAM rule and saying, nah, this time is different, right? Economists love to say this time is different or investors and they’re rarely right, but you do have to sit there. We have just been through a pandemic. We have been through a pretty extraordinary couple of years. So you do have to sit back and say, what is your best argument that not to believe the som rule this time? And the best argument is an interesting one, and that is as everybody knows, we’ve seen a huge surge in immigration in this country in the past few years. And let’s step aside from the politics of all this. We’ve seen a surge in both legal immigration and undocumented immigration and everybody agrees that’s happened. You can sort of debate exactly what the numbers are, but clearly there’s been an influx of millions of immigrants because we’ve had a ton of jobs that we haven’t been able to fill, and immigrants have come and filled a lot of those jobs, particularly in things like home healthcare that a lot of Americans native born don’t want to do, and it’s helped relieve some of the pressure in the economy.
But what gets interesting here from a job and a metrics perspective is immigrants notoriously do not answer these surveys. So the unemployment rate is based on literally somebody calling or knocking on a door and saying, Hey, do you have a job? If you don’t have a job, are you searching for a job? It’s a survey at the end of the day and it’s done by the Census Bureau. They’re very good at this stuff. They certainly knocked on my door during the 2020 in the midst, most of the pandemic. So they are very good at this, but you can imagine why, whether you’re a legal or an undocumented immigrant, you’re very hesitant to answer these surveys. You don’t understand what they are or what they’re used for. This is a government survey. And so what they’re arguing, and Claudia saw him, we had a good discussion about, look, it’s possible that more people are employed right now than we’re capturing, right?
We’re not capturing all of these immigrants who have been employed in the past two or three years, and so we could be registering a bigger unemployed population or certainly a smaller employed population than is actually true right now. And you got a debate, obviously the Census Bureau and the Bureau of Labor Statistics that put this stuff together, they know this too and they’re trying to adjust. They’ve got all these little adjustments that they run, but again, we’ve seen a pretty extraordinarily large influx in the last two or three years, and that just makes it harder to do a little fine tuning on your numbers when you just haven’t seen something of this magnitude before.

Dave:
Could you argue it could be the other way too. Your logic totally makes sense, but isn’t the inverse equally, maybe not equally as likely, but also likely that we also have a lot of immigrants who have come to the United States and are unemployed

Heather:
Possibly? Yep. You could possibly argue, you’re right. You could argue that the numerator in this equation or the denominator is off. And again, that’s why at the end of the day, I felt comfortable writing the column that I did that yes, we need to be concerned about this. This is a yellow flag. It’s clearly an impact, but you can’t ignore the, totally ignore the rise in the unemployment rate because it has been going on for basically a year now. And again, if this were just a three month trend, you might be able to argue and logic that away, but to see 12 months of something, that’s pretty solid trend at some

Dave:
Point. So yeah, I mean I believe that we still have an overall strong labor market, but the trend is towards a weaker labor market, which is not surprising. Basically what the Fed has stated that they’re intending to do to me makes sense as a yellow flag for a recession indicator. Are there any data points labeled or not that sort of point to the contrary that the economy is still doing? Well,

Heather:
I mean the biggest one, and we just got a little bit more data, will continue to get more data is spending, I mean obviously the bulk of the economy is consumption. No doubt. The consumption data has slowed. Whether you look at retail sales or whether you look at personal consumption expenditures that come out every month, whether you look at the University of Michigan, consumer sentiment data, all of this is showing a slowing, but again, that’s what you expected. The reality is growth last year, GDP as you were describing was 3%, which is well above the historic norm of 1.9 to 2%. So we had a really banner year last year, and that’s not going to go on forever. At some point, gravity comes back for the economy, and so you would expect growth this year to be more like that historical 2% trend. And sure enough, the Fed share, Powell sort of recently told Congress in this summer, yeah, we’re expecting a year this year to come in around 2%, give or take.
And so I guess I’d say it this way, I don’t see anything that looks like it’s falling off of a cliff. On the consumption side, I will say what’s hard to read is we’re back in, you can call it the two speed economy, the two tier economy, the khas economy, whatever you want to call it. The reality is the bulk of consumption that we were just talking about is driven by the top 20%, so not just the millionaires and billionaires, but the upper middle class, the people who can afford to go on those vacations to Europe who can afford to take their kids and throw them lavish birthday parties. And those folks are clearly doing generally pretty well. They’ve had a huge home surge. The stock market is up crazy amount so far this year. Their incomes have been doing just fine, and so they’re looking pretty sharp and they’re still spending, everything’s fine.
It’s a very different story for the bottom, certainly 40% of America. And you can see that. You can see that in things like the Walmart earnings call where they’re saying people are just spending less even on food, they’re literally not buying the meat anymore. They’re they’ve already traded down to the generic laundry detergent. There’s nowhere else for them to trade down. So they’re just buying the smaller bottle of laundry detergent. Obviously credit card debt is up. You can clearly see the pain in the bottom, which is pretty similar to the 20 18 20 19 economy. I’m sorry to say, we’ve just reverted back to that. It’s hard to really get a read. Is this a recession indicator or not? Because this is unfortunately how the US economy has generally operated for a long time.

Dave:
We got to take one more quick break, but more from on the market when we return. Welcome back to our show. Let’s jump back in. Given all the data you’ve shared with us, Heather, this seems like something is unfolding relatively slowly and it makes me wonder, you’ve alluded to this a few times already, how the Fed or maybe even other government institutions may intervene to try and shore up the economy. Do you think this, all of this data means a Fed rate cut in 2024 is more likely?

Heather:
I mean definitely. Obviously you’ve seen a huge move in the betting markets and now pricing in September rate cut as a certainty and probably another one and towards the end of the year. That’s my base case as well. I was surprised to see, I think it was Goldman Sachs sent out a note recently that they wondered there’s a fed meeting at the end of July, whether July 31st meeting we could actually see a cut. I don’t think so. Fed Chair Powell had a chance to open the door to that if he really wanted to, and he didn’t in a lot of recent appearances, but he’s clearly opened the door and sort of made it more likely that a September rate cut is coming based on his comments. I think the other interesting thing a lot of people forget, we were talking about what sectors are adding jobs and the fact that a lot of local governments are still adding jobs.
That’s a result of still a lot of that spending that the federal government doled out during the pandemic and in the recovery, particularly the final bill that was very controversial passed by Democrats only in 2021, that bill included a ton of money for local and state governments, a lot of which is still working through. And then of course we had the infrastructure bill, and so that money is helping to continue to propel the economy. You can debate if that’s a good idea or not. It’s certainly a lot less than it was in 2021 and 2022, but it’s amazing to still see some of those residual effects of that bump. And we could be in a much worse situation, arguably if we didn’t still have that. But you’re right, the forward looking, the, what everybody’s really looking for is when is the Fed going to finally start to cut rates, and number two, how quickly do they go after? So there’s the first cut, but it’s very hard right now to know a year from now like, sure, are they going to cut in September? High likelihood, but what do rates look like next summer? Have we had four or five cuts or have we only had maybe one or two? That’s a pretty big difference when we’re talking about the real estate sector, certainly, but also the credit card debt situation or corporate borrowing situations.

Dave:
Yeah, I completely agree. To me, that is the big question. It seems increasingly likely that the Fed is going to cut rates at some point, probably 25 basis points in 2024, maybe two, but probably not much more than that unless something really changes. But as we’ve seen the hiking part of the rate cycle, it took quite a long time for interest rates to really impact the economy in the way that the Fed expected it to. The first rate cut in the cycle was I think in April of 2022. So we’re now what, 27, 28 months after that. And yes, we’re starting to see the intended effect of a weaker labor market, but it took a really long time and it makes me wonder if the Fed one is going to go slowly to try and understand the impact. And two, I don’t really know even the right way to say this, but part of me feels like the first cut or even the cut in the cuts they do in 2024 is almost like psychological. They’re not actually expecting the rate cuts to lead to lower credit costs, lower borrowing costs, that’s going to lead to further investment. Or is it just like trying to send the business community and most Americans a signal? It’s like, we hear you, things are getting tight and we’re going to do what’s necessary to avoid a recession. And I dunno if there’s not really a question even buried in there, but I’m just curious what you think about their policy and if it’s going to have an immediate impact on the economy or labor market.

Heather:
Well, in terms of an immediate impact, I think you’re already seeing it. The stock market has obviously been rallying every time that you see something going on and you have seen a little bit of a cooling off in the bond markets, certain parts of the bond market, we’ve seen a little bit of a cooling off and mortgage rates very, very small. But as people start to predict that, as you say that a 25 maybe 50% basis points lower by the end of the year, so that’s starting to feed through a little bit. I think it will feed through and be very helpful in terms of the credit card debt. Some of these lower income consumers who are really maxed out, that can make a big difference in a couple hundred bucks of difference in how much you owe in a month or two. But you’re right.
Is it enough? I don’t know. It’s also going to be a challenge with the Fed because you don’t want to communicate that you’re ready to cut a lot more on that, whatever. Let’s say September is the meeting when they pull off the bandaid and do the first cut, they have to be careful. They have to be careful. They don’t want to over promise that we’re going to be reducing a lot more. Don’t worry, because reality also includes the fact that sitting here in a today, both of the major presidential candidates, not to get too political, but they both have pretty inflationary platform plans, particularly on the Republican side. You don’t know how much of these tariffs are going to come into play or whether they actually would try to devalue the dollar some of the ideas that are being floated. But if you’re the Fed, you got to be a little worried about that. They had to backtrack, and I covered the Fed and during the trade war days, and they really had to readjust their policy once the trade war really got going to the fullest extent. And so I think they’re going to be very conscious of, on the one hand, they have to say, oh, we’re just trying to balance the inflation into the job market, our dual mandate, blah, blah, blah. But there’s also this other reality that could come pretty quickly after the presidential election and congressional elections depending upon what happens.

Dave:
Definitely true on the political side. I’m sure they’ll have to respond to whatever candidate and party wins. I also think that the overpromising, it’s also similar to the way economists think about deflation, where it’s like if you’re expecting lower prices, it actually can inhibit spending in a way where if you’re saying, I just think in our world real estate investors, if the fence comes out and says, Hey, we’re going to actually cut rates 200 basis points over the next year. Well, when they cut at 25 basis points, that’s not going to move the housing market. Everyone’s going to say, Hey, I could wait if I’ve already waited this long. I’ll wait nine more months and we’ll get much cheaper mortgage rates. So I do think the Fed is obviously purposefully ambiguous about these things, but I actually think that’s a good thing. We don’t want them dictating the economy and telling you when to spend money. I do think we’ve gotten into this era where the Fed is almost like media darlings, and there’s good things about that, and I also think that there’s risk in oversharing, and they’re probably very conscious about how they’re going to do that going forward.

Heather:
Yeah, that makes total sense. I agree with you. I often argue to people that the economy’s almost become too reliant in the US on the Fed. If something’s a good investment, it should be generally a good investment no matter what the interest rate is within a little bit of reason. Obviously, when they get too high, you’re going to be a little bit more hesitant. It’s undeniable that buying a home right now is the most unaffordable in 40 years. That’s just a data analysis, but you’re right, at a certain point, it shouldn’t make that much difference if the rate mortgage rates 3% versus 5% if you’re buying a long-term investment.

Dave:
Well, Heather, thank you so much for joining us. It’s been a great conversation. I really appreciate it. For anyone who wants to read Heather’s work or connect with her, we will put her contact information and links to her bio, all that good stuff in the show description below. Thanks again, Heather. Thanks

Heather:
A lot for having me.

Dave:
Thank you all so much for listening to this episode on the market. Hope that you enjoyed this deeper dive into the labor market as it is a huge indicator of what’s happening in the economy with mortgage rates. As Heather and I discussed, if you like this show, don’t forget to share it with a friend or to leave us a five star review. It really helps us out. Thanks again. We’ll see you next time.

Dave:
On The Market was created by me, Dave Meyer and Kaylin Bennett. The show is produced by Kaylin Bennett, with editing by Exodus Media. Copywriting is by Calico content, and we want to extend a big thank you to everyone at BiggerPockets for making this show possible.