Caution with the 'SAM Rule' and Recession Warnings

The U.S. employment data for July 2024 showed signs of cooling, with only 114,000 new non-farm jobs added, and downward revisions of 29,000 jobs in May and June. This slowdown was primarily due to a deceleration in service sector and government employment. The decrease in part-time work and an increase in full-time positions may have temporarily suppressed non-farm job numbers. The unemployment rate rose to 4.3%, above the Federal Reserve's latest forecast for the long-term unemployment rate of 4.2%. Both the labor force and the number of unemployed individuals saw significant increases.

In July, the growth rate of average hourly earnings for all employees on private non-farm payrolls fell short of expectations. Despite unchanged job openings, the ratio of job openings to the number of unemployed dropped further, aligning closely with levels seen in 2019, indicating continued strength in labor demand.

With the rise in the unemployment rate in July, the "SAM rule" was triggered, fueling concerns about an economic recession. Although this rule has been validated in each of the nine U.S. recessions since 1960, it should be approached with caution in the current context. Firstly, using a more precise calculation method for the unemployment rate (retaining two decimal places) shows that the SAM index is currently at 0.49%, below the 0.5% threshold. Secondly, the 0.5% threshold may be overly stringent, as historical instances of U.S. recessions were associated with SAM indices ranging from 0.5% to 1.53%. Lastly, the unique backdrop of the current U.S. employment and economy, influenced by the COVID-19 pandemic and unprecedented fiscal stimulus, warrants greater caution when applying historical data predictions. Strong GDP and Private Domestic Final Purchases (PDFP) indicators suggest a higher likelihood of the SAM rule failing to predict an accurate recession.

Following the release of the employment data, markets temporarily priced in a "recession," leading to heightened expectations for interest rate cuts, including discussions around a 50 basis point cut. However, our analysis suggests:

1. After the employment data was released, the market temporarily showed a "recession" sentiment, and expectations of interest rate cuts increased significantly. However, we believe that although the U.S. job market is cooling, it overall remains resilient.

2. We do not believe that the U.S. economy has entered or is about to enter a recession. Additionally, the Fed is unlikely to cut interest rates by 50 basis points at its September meeting because doing so might send an overly pessimistic message about the economic outlook.

3. The current market risk aversion is affected by a variety of factors, including the risk release of U.S. technology stocks, the uncertainty of the U.S. election, and the intensification of tensions in the Middle East.

4. Once these short-term factors subside, asset prices may adjust.