As U.S. employment indicators deteriorate sharply, there are growing concerns about stock market shocks under 'Sahm's rule.' Sahm's rule states that if the average unemployment rate over the past three months rises by more than 0.5 percentage points compared to the lowest unemployment rate in the past 12 months, it should be viewed as a signal of recession.
In July last year, the Sahm's rule hit the market alongside poor U.S. employment indicators, and the liquidation of the 'yen carry trade' (a method of borrowing yen at a low interest rate to invest in countries or products with relatively high interest rates) shook global stock markets. However, since the unemployment rate has not yet risen, iM Securities advised that it should be monitored to determine whether this is a temporary phenomenon or a trend issue.
Park Sang-hyun, a researcher at iM Securities, noted in a report titled 'Déjà vu of July 2024 Sahm rule shock' on the 4th that this was the case. In July of this year, the number of non-farm jobs in the U.S. increased by only 73,000, falling short of the market expectation of 106,000.
In particular, the number of jobs for the previous two months was significantly revised downward. The number of new jobs in May was revised from 144,000 to 19,000, and the number of new jobs in June was revised from 147,000 to 14,000. This means that new employment over the past three months amounts to only 106,000.
Researcher Park explained that while the trend of a slowing U.S. labor market is clear, it is necessary to confirm through data whether there will be a rapid cooling. This suggests that a shock based on Sahm's rule may not appear immediately as it did in July last year.
First, while the increase in the number of jobs has diminished, the unemployment rate has not shown significant fluctuations. In simple terms, this means that while U.S. corporations are not engaging in additional hiring, they are also not laying off existing employees.
Additionally, the number of weekly jobless claims is showing signs of stability. Last week (July 20-26), the number of new unemployment benefit claims was 218,000, lower than the market expectation of 222,000. Researcher Park stated that 'historically, the level of new unemployment claims in the low 200,000s indicates that the labor market is in a healthy state,' adding that 'at the very least, this indicator should exceed 300,000 to be recognized as a genuine sign of labor market deterioration.'
One must also keep in mind that the job seasonally adjusted model has not been functioning properly since the launch of the Donald Trump administration in the U.S. The background for the decrease in job numbers in July relates to the Trump administration's downsizing policy, but there are also voices suggesting that the hiring flow in the government's education institutional sector has been disrupted since the COVID-19 pandemic, causing seasonal adjustments to not accurately reflect this.
Researcher Park stated that 'it is undeniable that mutual tariffs and illegal immigrant crackdowns are having a significant impact on the labor market,' but also noted that 'the lack of signals indicating rapid deterioration in other employment indicators aside from non-farm jobs suggests that further cooling is not expected.'