Donald Trump’s message to US voters has been consistent as he seeks to win a second term in the White House: the economy under Joe Biden has been a disaster.
Until recently the hard data has not supported Trump’s argument. The US has been comfortably the fastest-growing of the G7 leading industrial nations since the Covid pandemic. Unemployment has been low by historic standards. America’s self-sufficiency in energy meant it suffered a less severe inflation shock than Europe after Russia’s invasion of Ukraine.
Yet the former US president now has some evidence to back up his case. The latest set of US jobs figures, released last week, showed the labour market cooling fast. Payroll growth in July slowed to 114,000 – about half the average of 215,000 in the previous 12 months and well below economists’ expectations. The unemployment rate rose from 4.1% to 4.3%.
That set alarm bells ringing. Financial markets have been betting heavily on the US economy being able to shrug off the impact of higher interest rates. The latest GDP figures – showing annual growth of close to 3% – supported that view.
But the cracks in the labour market prompted fears that the economy might now be heading for a hard landing. The 12% drop in Japan’s Nikkei index was in large part driven by concerns that the world’s biggest economy might be cooling fast.
The Federal Reserve has a rule of thumb measure – known as the Sahm rule – for gauging whether the US economy is in recession. Named after the economist Claudia Sahm, this states that when the three-month moving average of the US unemployment rate is 0.5 percentage points or more above its low over the prior 12 months, the economy is in the early months of recession.
Last week’s jobless report from the Bureau of Labour Statistics showed the Sahm rule was on the brink of being triggered. As the consultancy Capital Economics pointed out, the rule will be met next month unless the unemployment rate falls back.
Historically, the Sahm rule has been a good predictor of looming US recessions, and it has been quoted widely in recent days by those arguing that the Federal Reserve has left it too long to cut interest rates. There has been speculation that, having fallen “behind the curve”, the Fed may not even wait until its next scheduled meeting next month, and may announce an emergency cut in the coming days.
Some economists warn against putting too much store by the Sahm rule. Dhaval Joshi, an analyst at BCA Research, said: “A decoupling between robust growth in the economy and steadily rising unemployment is unprecedented in our lifetimes. Through the past 60 years, whenever the US unemployment rate has increased by 0.5% in a year, taking it to the cusp of recession, GDP growth has also been on the cusp of recession. That is, until now.”
Joshi said unemployment was rising not because of widespread layoffs but because labour supply had been increasing faster than labour demand. The stock market looked more vulnerable to a recession than the real economy. Tech stocks, in particular those exposed to the artificial intelligence boom, have been among the heaviest fallers.
“Right now, if we should fear a US recession, the question is: a recession in what? As in 2000-01, the biggest risk is a severe recession in the frothy parts of the stock market,” said Joshi.
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But it is not just rising unemployment. There are other warning signs for Kamala Harris as she seeks to fend off Trump’s attacks on the current administration’s economic record.
The performance of the delivery company UPS is often seen as a gauge of how well the US economy is doing. Last month it failed to meet analysts’ estimates and pared back its growth forecasts for the rest of 2024.
With the presidential election only three months away, the economy is not about to plunge into immediate recession. But signs that households are reining in their spending is bad news for the Democrat presidential hopeful.