Unemployment Rate in Focus Ahead of Key Jobs Report

Unemployment Rate in Focus Ahead of Key Jobs Report

Could the rising unemployment rate signal a recession?

Senior ETF Analyst
Reviewed by: etf.com Staff
Edited by: James Rubin

This Friday’s nonfarm payrolls report is expected to be a “goldilocks” report, with 200,000 jobs created and a steady 4% unemployment rate.

But even a minor deviation from the consensus could be noteworthy. This year, headline payroll gains have been solid, with an average monthly increase of 255,000 jobs. 

Yet, in that same time, the unemployment rate has risen from 3.7% to 4%. It’s up even more from its post-Covid low point of 3.4% reached in January and April of 2023.

The nonfarm payrolls data and the unemployment rate come from two separate government surveys—the payroll survey and the household survey, respectively.

While the payroll survey has been showing strong job gains this year, the household survey hasn’t. No jobs have been added this year based on the household survey, compared to 1.5 million for the payroll survey.

Divergences in the two sets of data aren’t unusual, and the Bureau of Labor Statistics lays out several reasons why it happens, from sampling error to benchmark revisions to “off-the-books” employment.

In general, investors tend to favor the nonfarm payrolls report when gauging the health of the U.S. jobs market.

However, many investors also look at the unemployment rate, which is derived from the household survey’s measure of the number of unemployed people and the size of the labor force.

As mentioned earlier, that rate has been ticking higher. The number of unemployed people stood at 6.6 million in May, up from 6.1 million a year ago.

While little noticed up until now, the rise in the unemployment rate could begin to alarm investors if it triggers the Sahm Rule, a recession indicator.

According to the Federal Reserve Bank of Saint Louis, “the Sahm Rule identifies signals related to the start of a recession when the three-month moving average of the national unemployment rate (U3) rises by 0.50 percentage points or more relative to its low during the previous 12 months.”

Recession Looming? 

Currently, the three-month moving average of the unemployment rate is 0.37% above its low point over the previous year.
If the unemployment rate keeps rising, that could cause it to cross the 0.5% threshold, signaling a recession.

Of course, no recession indicator is foolproof. The inverted yield curve indicator that was hailed as an accurate harbinger of an economic downturn failed to live up to its reputation during this economic cycle.

Still, the rise in the unemployment rate bears watching, and could become more concerning if its joined by a slowdown in nonfarm payrolls growth.  

Sumit Roy is the senior ETF analyst for etf.com, where he has worked for 13 years. He creates a variety of content for the platform, including news articles, analysis pieces, videos and podcasts.

Before joining etf.com, Sumit was the managing editor and commodities analyst for Hard Assets Investor. In those roles, he was responsible for most of the operations of HAI, a website dedicated to education about commodities investing.

Though he still closely follows the commodities beat, Sumit covers a much broader assortment of topics for etf.com, with a particular focus on stock and bond exchange-traded funds.

He is the host of etf.com’s Talk ETFs, a popular video series that features weekly interviews with thought leaders in the ETF industry. Sumit is also co-host of Exchange Traded Fridays, etf.com’s weekly podcast series.

He lives in the San Francisco Bay Area, where he enjoys climbing the city’s steep hills, playing chess and snowboarding in Lake Tahoe.