Overnight US employment data once again reflects a cooling labor market, triggering the economic recession indicator "Dudley Rule".

As the unemployment rate rises, the market is closely monitoring the "Sahm Rule" indicator, which has been mentioned by Wall Street news. When the 3-month average of the unemployment rate rises more than 0.50 percentage points higher than the lowest value in the past 12 months, it triggers a recession.

According to JPMorgan's latest research report, the average unemployment rate for the three months ending in June was 4%, which is 0.46 percentage points higher than the lowest point of the previous twelve months, but 0.5 percentage points higher than the low point of the cycle.

This means that the current unemployment rate is only "one step away" from triggering the Sahm Rule, but another recession indicator has already been triggered.

Even before the Sahm Rule became popular, former New York Fed Chair Bill Dudley often used another rule similar to the Sahm Rule to measure economic recession — the "Dudley Rule" — which states that when the 3-month moving average of the unemployment rate is at least 0.3 percentage points higher than the low point at any time during the expansion period, the economy will (within 6 months) fall into a recession.

How far is the US from a recession?

Does this mean that the US economy is already on the verge of recession?

JPMorgan did not give an opinion, but the report gave two reasons to prove that the current US employment situation has certain special characteristics.

First of all, theoretically, the Sahm Rule has been 100% accurate in predicting since 1960. The report stated that the law is based on the theoretical premise that "once the unemployment rate rises significantly, it will continue to deteriorate", and from an actual perspective, there is no set of standard economic principles that can fully explain this premise.

The report further added that similar to the US market system, countries such as Canada and Australia have also experienced situations where the average unemployment rate exceeded the 0.5% threshold and did not deteriorate further.

Secondly, there is such a phenomenon in the current labor market: Some companies are unwilling to lay off employees due to the difficulty of recruiting employees in the past four years, which has led to the layoff rate staying at a cyclical low.

However, this alone is not enough to put pressure on the unemployment rate.

The report stated that according to the views of Robert Shimer, an economist at the University of Chicago, the impact of job-seeking rate accounts for three-quarters of the US unemployment rate, and the impact of quit rate accounts for one quarter, and the job-seeking rate has a strong pro-cyclical trend. The counter-cyclical impact of job-exit probability is weak.

This view is also supported by data. JOLTS employment data since 2000 shows that layoff rates only explain 44% of the change in unemployment benefits, while employment rates explain 72% of the unemployed. This means that even if layoffs are not obvious, a decrease in the number of hires may result in an increase in the unemployment rate.