The author is an analyst for NH Investment & Securities. He can be reached at sw.kang@nhqv.com -- Ed.
With the US unemployment rate rising for a second straight month, we are nearing the threshold for the Sahm Rule recession indicator (which has a 100% historical accuracy rate). Given the effects of the auto industry strike in October, time is needed to confirm a recession, but a labor market slowdown is now evident. Slowing employment data is to stagger and eventually lead to a slowdown in consumption.
Sahm rule and what matters in labor market
Employment data is a classic lagging indicator, so recession indicators using it have a high win rate. Among recession indicators using employment data is the Sahm Rule. It states that a widening by more than 0.5 percentage points in the gap between the lowest unemployment rate of the previous 12 months and the average unemployment rate of the last three months signals a recession. The Sahm Rule boasts a 100% win rate.
The US unemployment rate for October came in at 3.9%, slightly above consensus. For the second month in a row, the unemployment rate beat market expectations, raising the recession indicator under the Sahm Rule to 0.43%p. We note that only a 0.1%p increase in the unemployment rate in November will be sufficient to reach the recession threshold of 0.5 percentage points. Both the sharp drop in short-term yields after the October jobs report and the earlier timing of the 2024 cut, as reflected in futures markets, was due to the fact that the employment data signaled a recession. Given the effects of the US auto industry strike in October, it will take time to determine the validity of Sahm Rule, but it is at least clear that employment data has begun to slow.
We also note that the number of people with multiple jobs surged for the second month in a row, reaching an all-time high. Notably, the number of dual-employed people working full-time is also at an all-time high. This indicates that US households are struggling to preserve their purchasing power against high inflation.
Hourly earnings have been declining since July, with average weekly hours actually falling, meaning that the purchasing power of earned income is shrinking. Nominal wage growth has also been losing steam, and the tepid employment data is likely to stagger and eventually lead to a slowdown in consumption.
South Korea enters liquidity tightening phase
South Korean inflation came in at 3.8% (y-y) in October, beating market expectations and previous estimates. But, core inflation is likely to remain below 3% by year-end amid a slowdown. Headline inflation driven by import prices is unlikely to be a game changer.
More so than inflation, we are focused on the restrictions on lending for Special Home Loans, which have been a large source of liquidity this year, and the implementation of a rate hike from November. Around W50tn worth of liquidity has been provided this year through special home loans and 50-year mortgages. As liquidity supply shrinks, we believe that the effects of the interest rate upcycle will come to the fore.