Tonight's U.S. non-farm payrolls report is set to reach a pivotal moment.

Overseas, the U.S. job market continues to weaken, and the manufacturing sector is contracting, causing investor concerns to rise: the number of initial jobless claims for the week ending July 27 exceeded expectations, while the U.S. July ISM manufacturing PMI stood at 46.8, marking the largest contraction in eight months and intensifying market fears of a U.S. economic recession. U.S. stocks were affected by this, with all three major indices falling.

Now, investors are nervously awaiting the results of the significant non-farm data for July.

At 8:30 PM Beijing time, the U.S. July non-farm employment data will be released. Most on Wall Street expect that the non-farm jobs added in July will be 175,000, potentially falling to the lowest level since April and the second-lowest record in the past nine months; the unemployment rate remains unchanged at 4.1%, holding at the highest level in two and a half years for two consecutive months, with average hourly wages increasing by 0.3% month-on-month, in line with the previous value.

It is worth noting that if this non-farm report shows that the U.S. unemployment rate in July continues to rise, it could trigger the Sahm Rule's economic recession warning, and this indicator has a 100% accuracy rate in predicting economic recessions since 1970.

According to the Sahm Rule, when the three-month moving average of the unemployment rate rises by 0.5% or more from its low over the previous 12 months, the U.S. economy enters a recession, and this rule has been 100% accurate since 1970.

That is to say, if the U.S. unemployment rate rises to 4.2% in July, it would trigger the Sahm Rule's economic recession warning.

Sahm Rule

The Sahm Rule, proposed by economist Claudia Sahm in 2019, is primarily designed to help the U.S. government understand when an economic recession might arrive, in order to formulate loose policies to assist families through tough times, and is therefore widely recognized as a reliable indicator for predicting economic recessions.

In recent months, as the U.S. unemployment rate has gradually increased, market concerns about the condition of the U.S. labor market have also grown.The non-farm report for June indicates that the U.S. unemployment rate rose further from 4% in May to 4.1%. The Sam Rule value for June was 0.43%, approaching the warning line of 0.5%. Sahm stated in early July:

The Federal Reserve is taking a significant risk by not adopting a gradual rate cut now. If no action is taken, it could trigger the "Sam Rule," leading to an economic recession, which might force policymakers to take more aggressive actions.

Nevertheless, some analysts believe that even if the unemployment rate continues to rise by 0.1 percentage points in July, it is highly unlikely that the Sam Rule will be triggered.

Capital Economics explained that this is because the early low point of 3.5% in July 2023 has exited the 12-month comparison period, replaced by a higher 3.7%. "Furthermore, Capital Economics believes that the recent rise in the unemployment rate is due to the decline in the employment rate of the 16-24 age group, with weaker hiring intentions from businesses hindering their search for summer jobs.

However, some analysts question the reliability of the Sam Rule.

In recent years, as the Federal Reserve has continuously raised interest rates and maintained them at high levels in the hope of curbing inflation, this has led some economists to predict that an economic recession in the United States is imminent. After all, historically, high interest rates increase the borrowing and spending costs for businesses and individuals, and the economy will inevitably take a sharp turn for the worse.

But some economists have pointed out that the current economic situation in the United States is unusual, and previously reliable indicators of economic recession have also sounded false alarms. For example, in 2022, the inversion of the 2-year and 10-year U.S. Treasury yields suggested that the U.S. economy would enter a recession, but so far, the U.S. economy has not yet receded.

Another leading economic indicator, LEI, compiled by the Conference Board, also signaled in early 2022 that the U.S. was on the brink of an economic recession, but it seems to have failed as well.

Therefore, some market participants are reserved about the relevant economic recession forecast indicators.

At the press conference on Thursday, Federal Reserve Chairman Powell was also asked about his views on the Sam Rule, but he did not answer directly. Instead, he more tactfully stated that there is no need to overly worry about the current unemployment rate:Never assume that the economy will remain static; we must understand that in the post-pandemic era, many of the rules you knew have become obsolete. The inflation triggered by economic stagnation, coupled with supply chain disruptions amidst very strong demand, is indeed unusual, or rather, unprecedented.

The labor market is not as bad as it seems, as the employment situation is currently very complex. The rise in unemployment is not merely due to people being fired, but also because there are more individuals willing to work who are still actively seeking employment. Therefore, a slight increase in the unemployment rate is not something to be overly alarmed about.

Supported by strong labor demand, the unemployment rate, which hit a nearly 50-year low last year, is currently close to the pre-pandemic average.

Sarah House, an economist at Wells Fargo Securities, stated that if the recent rise in unemployment is confirmed to be a normal rebound from the exceptionally low levels caused by the special circumstances of the post-pandemic economy, rather than an early sign of an economic recession, then the "Sam's Law" will not be the only signal that fails in this economic cycle.

However, vigilance is still required, as the momentum of the job market is difficult to change in the short term, and we believe that the risk of an economic recession remains very high at present.

The Federal Reserve is shifting its focus.

The Federal Reserve is now refocusing its anti-inflation efforts back to its dual mandate: inflation rates are expected to decline, and economic growth remains quite strong, with the labor market maintaining its current state.

At the policy meeting in July, Federal Reserve Chairman Powell stated that the labor market is returning to a better balance, with unemployment still low, and current data showing that employment conditions have returned to pre-pandemic levels.

Powell believes that the labor market is not currently the source of inflationary pressure, which is why the Federal Reserve does not want to see an excessive cooling. However, the weakness in labor market conditions has made the committee more convinced that the economy is not overheating. Powell reiterated that if there are signs of a significant downturn in the labor market, the Federal Reserve will respond, adding that the policy is prepared to handle any challenges to its dual mandate.