The unemployment rate rose to 4.3% in July, up from 4.1% in June. This jump marks the highest unemployment level in nearly three years. The Sahm Rule reading for this period is 0.53%, which is an increase from the 0.43% reading in June. While the 4.3% figure is still historically low, the speed of the increase has caused concern. I see these numbers as a signal that the labor market is softening.
The mechanics of the Sahm Rule
The Sahm Rule tracks the three-month moving average of the national unemployment rate. It compares this moving average to the lowest three-month moving average from the previous 12 months. A recession becomes likely when this difference is 0.50 percentage points or more. In July, the three-month average unemployment rate was 4.30. This is 0.13% above its low for the previous 12 months according to some data. Another calculation shows the 4.3% rate is more than a half point above the 3.6% average from one year ago. The Bureau of Labor Statistics (BLS) publishes this data. They collect information through the Current Population Survey (CPS), which interviews households, and the Current Employment Statistics (CES) survey, which gathers information from employers. The Sahm Rule uses only this single data series. This simplicity makes it a popular tool for identifying downturns. Since 1950, the rule has signaled every one of the 11 recessions. It typically signals a recession about three months after it starts. The rule has only one false positive in its history. That false positive occurred in 1959. Even then, the US entered a recession six months later.
The Bureau of Labor Statistics (BLS) publishes the monthly unemployment rate. This data comes from the Current Population Survey (CPS), which interviews households, and the Current Employment Statistics (CES) survey, which gathers information from employers. The rate shows the percentage of the total labor force that is unemployed but actively seeking employment and willing to work. The BLS is a unit of the United States Department of Labor. This monthly report is part of the broader Employment Situation Summary.
Market volatility and economic fear
The rising jobless numbers caused immediate turmoil in the stock market. The Dow Jones Industrial Average fell 363 points, or 1.5%, on Friday. The S&P 500 index dropped 1.4%, though one source says it fell 1.8%. The Nasdaq Composite fell 2.4%. Investors fear a 4.4% unemployment rate could signal even more weakness. The rise in unemployment suggests a flagging job market. This decline in stocks happened because of fears regarding a soft landing. A soft landing is when the Federal Reserve lowers inflation without causing a recession. Sarah House, an economist at Wells Fargo, says the rising unemployment rate raises concerns about this possibility.
Labor supply and immigration factors
The increase in unemployment does not only come from layoffs. The labor force grew by 420,000 workers in July. This increase in the pool of people looking for work can push the unemployment rate higher. Ryan Sweet, the chief U.S. economist at Oxford Economics, says many people left the workforce during the pandemic for health or family reasons. Others returned because of rising wages. Immigration also influenced these numbers. RBC Capital Markets estimates that immigrants filled about one third of the 3 million jobs added in 2023. Goldman Sachs notes that new immigrants often have more difficulty finding work during their first few years in the country. This difficulty can push the unemployment rate higher. The pandemic also created mismatches between jobs and workers. Many workers had to retrain for different industries after the pandemic. Consumer demand shifted from goods back to services, which changed the types of workers needed.
While the Sahm Rule indicates a recessionary environment by comparing the three-month average unemployment rate to the prior year’s low, the influx of new workers and immigrants complicates the reliability of this specific signal.
Why the rule may not apply
Many economists argue the Sahm Rule might not apply this time. They believe the pandemic-era labor disruptions make the rule less reliable. Although unemployment insurance claims have reached their highest levels in more than a year, they remain historically low. This is because employers have been reluctant to cut staff after the COVID-related labor shortages. The economy has been unusually defiant. Gross domestic product has continued to grow. Consumer spending and business investment remain resilient. Household income is also growing. I find the combination of a Sahm Rule trigger and growing consumer spending to be the most important contradiction in the current data.
| Economic Metric | July 2026 Data |
|---|---|
| Unemployment Rate | 4.3% |
| June Unemployment Rate | 4.1% |
| Three-Month Average | 4.30% |
| 12-Month Low Average | 3.6% |
| Sahm Rule Value | 0.53% |
| Sahm Rule Threshold | 0.50% |
| Fed Funds Rate | 5.25% to 5.5% |
| Inflation Rate | ~3% |
| 2023 Job Additions | 3 million |
| New Labor Force Entrants | 420,000 |
The Federal Reserve and interest rates
The Federal Reserve must manage both inflation and employment. Inflation is around 3%, which is much lower than the 9.1% peak in 2022. However, this is still above the 2% goal of the Fed. Interest rates have stayed between 5.25% and 5.5% since last summer. Jerome Powell, the Fed Chair, says the labor market is normalizing. He is watching to see if the market shows signs of a sharper downturn. Rick Rieder, the chief investment officer at BlackRock, says a September rate cut is almost a given. He believes the current interest rate is too restrictive because inflation is trending lower and labor force slack is building. Elyse Ausenbaugh, the head of investment strategy at J.P. Morgan Wealth Management, says the Fed may have fallen behind the curve.
The rising unemployment rate reflects a growing number of people looking for work. These include Americans who left during the pandemic to care for children or for health reasons. Others were drawn into the job market by robust wage growth. The job market is feeling these effects. Hiring has dipped well below pre-pandemic levels. The number of people quitting jobs tumbled to 3.3 million in June, which was the lowest level since 2020.
Assessing the recession risk
The Sahm Rule is a powerful tool, but it is not a crystal ball. Claudia Sahm, the economist who created the rule, says a recession is not imminent. She says the volume on the Sahm Rule is probably turned up a little too loud right now. She notes that the swing from labor shortages to immigration can magnify the unemployment rate. She also believes the Fed should focus on the second part of its mandate: maximum employment. The labor market is showing real softening. If layoffs continue to edge up while hiring lags, it could push the unemployment rate higher and lead to a recession.
The jobless rate rose.
Recession is not imminent.
Will the Federal Reserve decide to implement a 50-basis-point rate cut in September?